The construction sector is expected to be worth some RM182 billion of incoming domestic jobs over the next 5-10 years.
Is the construction sector geared for a rebound? CIMB Research construction analyst Sharizan Rosely believes so.
“In our view, sector developments year-to-date provide greater conviction for a recovery of construction plays from 2H15. Both the government and private sector have geared up for an execution year in 2016, suggesting that more positive news flow and greater visibility will converge in the months ahead,” he recently stated.
Sharizan (pic) says an analysis of sector tender and award backlog points to a surge in total jobs awarded in 2016.
“2014 was a good year as tail-end 10th Malaysia Plan (10MP) projects were implemented. 2015 has so far shaped up to be a transition period from planning and approvals to the pre-award phase for selected major projects. We have seen a rise in the number of contractors becoming more aggressive in order to win projects given the freeing-up of capacity after the completion of existing jobs over the past 12 months. This ties in with the overall sector indicators that are pointing to a favourable 2H15 and 2016.”
Etiqa Insurance & Takaful’s head of research/ head of products & alternative investments Chris Eng notes that the sector has done well earlier this year especially smaller players such as Mitrajaya.
“Going forward, we believe news flow may still sustain over the next few months with contracts from RAPID [PETRONAS’ Refinery and Petrochemicals Integrated Development], WCE [West Coast Expressway] and Sarawak. The concern is whether the current political situation may slow down other awards for next year,” says Eng.
Meanwhile, Instacom Group Berhad’s executive director Choo Seng Choon (pic) also strongly believes that the construction sector would be making a strong comeback.
“The construction sector is the catalyst for other industries to follow suit,” he says. “Once it moves into full speed, other industries will follow suit, such as infrastructure, mining and manufacturing amongst others.”
“However, it’s also imperative for our construction players to diversify risks to realise greater earnings potential. One of such options is to diversify earning base through overseas ventures,” he further said. The Instacom Group is involved in construction through its associate company, Vivocom Enterprise Sdn Bhd, which is principally involved in civil engineering and construction within Malaysia and also in the Middle East and Bangladesh.
Value of incoming jobs increasing
Sharizan projects RM182 billion worth of incoming domestic jobs over the next 5-10 years – this would be the sector’s all-time high. “We roughly estimate that 10% of the RM182 billion total figure has a fair chance of being awarded in 2H15, while the balance 90% would flow through from 2016.”
CIMB has identified several high-priority projects that could come onstream from 2016. “11MP kicked-off with RM142 billion worth of projects. The government’s focus for the next five years remains on upgrading the public transport system and introducing new ones, particularly within the rail segment. Excluding the non-substantial projects i.e. valued below RM1 billion, 90% of total incoming jobs are high value and high impact.”
The main projects are:- the RM28 billion MRT 2, RM27 billion Penang Transport Master plan (Penang TMP), RM27 billion Pan-Borneo Highway, and the RM30-40 billion KL-Singapore High-Speed Rail (HSR).
The increase in the value of incoming jobs suggests that job wins could be substantial in the next two years, particularly for the three major segments i.e. rail (public transport), oil & gas infra/marine/port, and water infra. IJM Corp now leads the sector with its order book of RM7bn, its all-time high. But Gamuda’s order book could overtake this once MRT 2 and Penang TMP awards gain momentum in 1Q16.
CIMB has an Overweight rating on the construction sector. “Share prices of contractors are usually positively correlated with positive news flow, particularly so in view of contract visibility that is much better today than in 2014,” says Sharizan.
However, he cautions investors positioning for a potential rebound in 4Q15 to be selective. “For this, we prefer Gamuda for its dominance in mega rail jobs, small/medium cap Muhibbah Engineering for its niche infra exposure and USD play, and Salcon for its turnaround story.”
Gamuda is CIMB’s top big cap pick as it provides the biggest exposure to a recovery in sector catalysts in 2H15. It offers an attractive play on MRT-driven order book growth and diminishing political risks for its water assets divestment, says Sharizan.
With its 12th Aug appointment as the Project Delivery Partner (PDP) to oversee and realise certain key components in the RM27 billion Penang TMP, Gamuda is now the sector’s largest PDP with exposure to MRT, MRT 2, and Penang’s public transport upgrade. The Penang TMP job, coupled with its property ventures in Penang, also secures its longer term earnings growth beyond the Klang Valley. Press reports pointed to total project value of RM10 billion for phase 1 of the alternative Penang TMP master plan, which is slated to start work in 2017.
Muhibbah Engineering and Salcon, meanwhile, offer high upside potential, more so as their share prices had recently taken a beating amid weak market sentiment.
Muhibbah is the cheapest among turnkey contractors with its improving order book quality. “Investors should consider the group’s niche position in potentially securing more jobs in RAPID – it has so far won two packages there. Job wins could surprise on the upside in 2H15. Muhibbah provides direct exposure to one of the three major sector drivers and is the biggest beneficiary [among contractors] of a strengthening US dollar.”
Salcon’s main appeal continues to be its major turnaround story, highlights Sharizan. Salcon is a major laggard and the only indirect play on rail public transport via its rail rights-of-way (ROW) concession to lay and monetise fibre-optic lines via potentially multiple contracts with telco players. Moreover, it could be the biggest beneficiary of water contracts, which should drive the strong earnings recovery in 2016. Salcon’s tender book amounts to RM1.3bn and its order book could surge 72% if its lands one or two water or sewerage facility jobs, says Sharizan.
Note: The above commentary is not a recommendation to buy or sell stocks. Please consult your stockbroker before making any investment decision.