Sarawak Consturction (Overweight): Shifting into high gear, CMS (BUY): TP upgraded

Construction (Overweight): Sarawak shifting into high gear

What’s New

·         We expect a few major construction projects in Sarawak to materialize soon including:

i)              MYR15b Pan Borneo Sarawak Highway

ii)             MYR9b Baleh HEP

iii)            MYR700-800m Kuching Centralised Wastewater Management system.

·         The government is also committed to maximize the benefits of these projects to the Sarawak construction players.

·         On top of that, we also expect more construction works from SCORE, as well as rural and urban development projects.

·         Based on the timeline, we expect job awards to start accelerating in 2H15, especially as we get closer to the state election.

What’s Our View

·         Positive sentiment will continue building as the Sarawak state election could be held earlier in Sep/Oct 2015.

·         Historically, share prices have displayed positive trend pre-election.

·         Pan Borneo Sarawak Highway will be the largest single construction project in Sarawak in terms of MYR15b value.

·         Adding the other projects including Baleh Dam, there would be an unprecedented demand for construction services and building materials in Sarawak.

·         With better earnings visibility, this would be re-rating catalyst for Sarawak construction players

·         Share prices of the some of the Sarawak stocks have performed well YTD.

·         However, forward valuations of the Sarawak stocks excluding CMS remain undemanding at 8x, which is below the current FBM small cap index forward valuation of 10x.

·         Stock picks: CMS is our key Sarawak play as the main building materials player and construction player in Sarawak.

·         We also like HSL (BUY, TP: MYR2.15) that is expecting a major job win that will boost its orderbook to a new high.

·         Harbour-link (BUY, TP: MYR3.65) is an alternative Sarawak play as the dominant logistic player in East Malaysia.

Cahya Mata Sarawak (BUY, TP: MYR5.95, SP: MYR5.42): Riding on the high tide

What’s New

·         Prime beneficiary of Sarawak’s LT economic and industrial development which will lead to rising construction jobs and stronger building materials demand.

·         Its planned capacity expansion at its cement and quarries are timely to meet stronger demand.

·         We are just assuming total cement sales growth of 3% YoY in 2016. Meanwhile, cement production is estimated to grow at 15% YoY in 2016 after including the imports.  

·         We see potential upside to earnings forecasts from the major infrastructure project roll-outs and strategic investments.

What’s Our View

·         We price in the bullish outlook and raise our SOP-based TP to MYR5.95 (+19%).

·         Reiterate BUY.