Job Orders, Earnings Visibility Key to MYR Construction Sector

18 May 2016

Credit Markets View

Job Orders, Earnings Visibility Key to MYR Construction Sector  

Highlights                                                                                        

Gamuda and IJM remain as our top fundamental pick in the MYR construction sector, underpinned by a strong balance sheet; good earnings visibility with robust orderbook; and diversified business model with stable base of recurring income from the infrastructure/concession division which forms c.37%-43% of the pretax profit. As such, these factors justify their tighter spreads of c.30-35bps than similarly rated WCT (AA-/Neg).   

¨           Key projects award continue to benefit the big boys more. Gamuda and IJM continue to secure more jobs from infrastructure projects such as the MRT2, LRT3 boosting their orderbook to MYR7.7bn (for Gamuda) and MYR9bn (for IJM) which is equivalent to 6-9 years of FY15 construction revenue. Credit profiles are further supported by the strong recurring income base from the infrastructure/concession assets which contributed to about 37-43% of the pretax profit (Figure 1). Leverage ratios are within the AA3/AA- range with both registering gearing of 0.67x; while FFO Debt Coverage (FFODC) is expected to linger above 0.15x driven by the strong orderbook replenishment. As such, we maintain our neutral view on Gamuda’s and IJM’s fundamentals. 

¨           Tight liquidity on second-tier players like Mudajaya (RAM A2/Sta) and Eversendai (RAM A2/Sta). Mudajaya’s refinancing risk is growing given the lumpy maturity of MYR240m in January 2017 versus cash in hand of MYR70m as at FY15. The recovery from project variation orders may take a longer time to crystallise, hence, we reckon the company will need to refinance the bond. Gearing is likely to increase following the recent announcement to acquire 73.69% stake in PT Harmoni Energi, who owns a 2x17 MW coal-fired power plant in Indonesia. Separately, Eversendai has the highest gearing among the construction players under our coverage of 1.0x as at FY15; while FFODC of 0.13x is still below the 0.15x downgrade threshold.

¨           On an RV perspective, we prefer to stay neutral on duration for better earnings visibility and unexciting yield pick-up given a flat curve. Both Gamuda and IJM were valued at 30-35bps more expensive than WCT due to recurring income superiority and the latter’s negative outlook by MARC since Oct-2015. This was premised on its weakening leverage metrics and headwinds on the property segment. Nevertheless, we will continue to monitor the deleveraging progress of WCT via a potential REIT plan this year with gearing at 0.99x as at FY15 (FY14: 1.09x).