CIMB: Construction sector firmly on recovery path

CIMB has upgraded the construction sector to overweight from buy, as it believed the sector is now firmly on recovery path.

In a report here yesterday, the research house said the positives were clearly emerging for the country’s construction sector, thanks to subsiding uncertainty, a smooth political transition, government pump-priming through two stimulus packages and cheaper input costs.

“Another reason for our increasing optimism about the construction sector is our recent upgrade of the Malaysian market and investors’ increasing preference for higher-beta plays such as the cyclical construction stocks,” CIMB said.

CIMB raised IJM Corporation Bhd, Gamuda Bhd and WCT Bhd to outperform from trading buy. Across the board, it upped its construction target price-earnings ratio (PER) to 15 times from 13.5 times, and reduced it revised net asset value (RNAV) discounts by 20% to 30%.

“Given IJM’s outperformance, WCT is now our top pick in addition to Gamuda. We continue to rate MRCB (Malaysian Resources Corporation Bhd) a trading buy as a play on GLC (government-linked corporation) construction stocks,” CIMB said, adding that it also liked Mudajaya Group Bhd for its recurring income prospects for its Indian independent power producer.

CIMB had identified 12 mega projects valued at up to RM80 billion, in which a bulk of them was not part of the government’s stimulus package. Leading the pack would be the Klang Valley light rail transit (LRT) extension and upgrade, which is expected to worth between RM30 billion and RM35 billion.

“Syarikat Prasarana Negara (SPNB), which is the asset owner of public transport in the country, is expected to call for tenders as early as July 2009,” the research house said.

CIMB added that given the government’s flight to quality in its selection of contractors, it is understandable why IJM Corp, WCT, MRCB, Gamuda and UEM Builders Bhd are potential winners of the LRT job.

Meanwhile, CIMB said another project that could be awarded soon would be the RM1 billion to RM2 billion water infrastructure project in Sabah. WCT might clinch the award, given the experience it gleaned from the Kudat water supply scheme, the research house said.

There would also be two biggest private finance initiative (PFI) jobs, such as the RM5 billion Gemas-Johor Bahru double-tracking project and the RM2 billion new low-cost carrier terminal (LCCT).

“While the LCCT terminal was featured in the 2nd stimulus plan and is a fast-track job, the double-tracking project is likely to involve the participation of a Chinese contractor, similar to the structure of the RM4.3 billion Second Penang Bridge where China Harbour Engineering Company (CHEC) partners UEM Builders,” CIMB said.

The research house added that positive surprises from the progress of the Bakun power transmission could be expected in the second half of 2009. Thanks to cheaper steel prices, the progress of the Bakun power transmission project may take off sooner rather than later as its cost has come off from RM14 billion to RM9 billion, CIMB said.

“Among the two to three local players, MRCB stands a high chance of emerging as the key beneficiary given the experience it gleaned from undertaking two major power transmission jobs in the country,” it said.


This article appeared in The Edge Financial Daily, July 1, 2009.