Construction (OVERWEIGHT): The infrastructure mania

Construction (OVERWEIGHT): The infrastructure mania

Sector outlook

·         Construction jobs visibility has strengthened significantly with the record awards of PDPs for 4 major infrastructure projects with total value of MYR80b.

·         Besides, there are also ongoing tenders for highways worth MYR24b and RAPID, Pengerang subcontracts that could worth MYR4-6b.

·         The major transit-oriented developments including BBCC, TRX, Kwasa Land and Bandar Malaysia with total GDV of ~MYR100b are also expected to start construction works soon and would contribute long term job flows of up to MYR40b.      

·         Based on the potential upcoming job awards, the potential infrastructure job awards in 4Q15 and 2016 could amount to >MYR76b.

·         We believe this would sustain the robust construction sector.

·         We also expect further affirmation in the upcoming National Budget 2016 and potential positive surprise from revival of suspended projects.

Valuations

·         KLCon Index has dropped 3.1% YTD in line with the recent broad market weakness mainly due to the exit of foreign investors.

·         Hence, sector valuation has turned attractive as the KLCon’s 1-year forward PER has also retraced to 12.1x from its high of 15x in Feb 2015.

·         We believe positive sentiment in the sector would strengthen and sector valuation would improve as job awards picks up.

·         Reiterate OVERWEIGHT with Gamuda as Top Pick.    

IJM Corp (BUY, TP: MYR3.70, SP:MYR3.37): Construction to lead growth

·         IJM’s potential job win could surpass our FY3/16 and FY3/17 forecasts.

·         We tweak our earnings forecasts to price reflect lower plantation (reduce CPO ASP forecasts) and concession earnings while raising construction job win estimates.

·         Adjusted our RNAV TP to MYR3.70 (from MYR3.90) after we: i) adjust our earnings, ii) roll forward our DCF valuation base year for the concessions and iii) raise our property division discount to RNAV to 30% from 20% to price in the higher industry risk and to be in line with our property sector valuation.

·         Reiterate BUY at lower TP of MYR3.70.