AmWatch - Sarawak Stocks : State election theme OVERWEIGHT, 18 Jun 2015

FOCUS OF THE DAY

Sarawak Stocks : State election theme   OVERWEIGHT

Speculation on a snap state election has been ratcheted up a few notches in recent days. Some Sarawak stocks may come under another round of election-theme trading in the lead up to the polls. SCable, HSL and KKB are our top picks.

While SCORE has slowed over the past 1-2 years, Sarawak remains  resilient, with state cash reserves standing at over RM20bil. The federal government has also committed RM27bil to build the 1,663km-long Pan Borneo Highway, and much more to develop the state, particularly in rural infrastructure. Apart from the Bakun and Murum dams, two more – the RM4bil Baram (1,200MW) and RM9bil Baleh (1,295MW) dams – will soon be constructed simultaneously.

SCORE beneficiaries: A stand-out among the beneficiaries of SCORE is SCable (BUY, FV: RM1.70/share). Its position as the leading domestic integrated transmission line player puts it in good stead to secure jobs stemming from the construction of the dams. HSL (BUY, FV: RM2.30/share) will be a strong contender for works packages of the Pan Borneo Highway given its expertise in land reclamation jobs, which will be required for certain stretches of the highway. HSL is also tipped to secure the second phase of the Kuching central sewerage system, which will be worth at least ~RM500mil. It had in 1Q15 completed the first phase, which was worth RM452mil.

KKB (BUY, FV: RM2.05/share) will benefit from government expenditure in rural development, particularly in the supply of steel pipes for water projects. KKB’s earnings profile is anticipated to change significantly, given its foray into O&G support services via 42%-owned associate Oceanmight Sdn Bhd. We understand it has recently won a ~RM10mil contract to supply a helicopter deck for an oil and gas platform. CM Adenan Satem has said  Petronas would offer RM2.1bil worth of O&G jobs to local companies.

We are underweight on the timber sector and have HOLD on JTiasa (FV: RM1.57/share) and Ta Ann (FV: RM3.98/share), given the uncertainties surrounding the industry. A bright spot would be the sustaining of global log prices in view of the shrinking supply. We believe SCable, HSL, and KKB are adequately supported by fundamental and growth prospects, and are currently trading at undemanding valuations. Reiterate BUY for the three stocks.

Others :

Econpile Holdings : Wins a RM49.9mil job to cap off FY15               BUY

Top Glove : Higher earnings on sustained margin expansion        BUY

Eco World Development : Launched new projects over the weekend     HOLD

Banking Sector : Implications from Moody’s change in bank rating methodology                NEUTRAL

QUICK TAKE

Water Sector :  A waiting game  NEUTRAL

NEWS HIGHLIGHTS

AirAsia : Capital plans includes beefing up funds

Sarawak Cable : Sarawak Cable to up power cable exports

Eastern & Oriental : Tamarind project launch this weekend

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.