Construction re-rating in M'sia soon

Petaling Jaya (The Star/ANN) - A re-rating of the construction sector in Malaysia may be on the cards as domestic job awards worth 18 billion ringgit (US$5.91 billion) is expected to materialise in the second quarter.

Alliance Investment Bank Bhd analyst Jeremy Goh, who has a target of 18 billion ringgit for domestic job awards this year, pointed out that the recent concession agreement for the 5.2 billion ringgit West Coast Expressway (WCE) could potentially be the largest job this year.

He expects more awards for other packages to materialise in the second quarter but cautions that a big portion of the awards hinges heavily on the assumption that the ruling government remains in power following the 13th general election, which must be held latest by May.

The WCE project starts from Banting in Selangor to Taiping, spanning a distance of 316 kilometres, of which 233km would be tolled.

Although the project was initially approved a year ago, it was delayed due to certain clauses in the agreement.

Hong Leong Investment Bank Bhd analyst Jarod Soon said the finalisation of the concession agreement was positive news for the sector.

The WCE project would create order book replenishment opportunities for various construction players. Soon believes that companies with civil and infrastructure expertise will benefit the most.

"The biggest winner from this development will be IJM Corp Bhd. This is because it holds a 20 per cent stake in WCE and also a 25 per cent stake in Kumpulan Europlus Bhd (KEuro)," he said.

KEuro holds the remaining 80 per cent stake in WCE; hence IJM's stake in both entities will give it the advantage of securing construction works for the project.

"IJM is eyeing 70 per cent of the works portion worth 4 billion ringgit. If successful, this will triple IJM's existing outstanding order book of 2.3 billion ringgit to 6.3 billion ringgit," Soon said.

Other sizeable jobs include the Southern Double Track worth 8 billion ringgit, Tun Razak Exchange earthworks valued at 1 billion ringgit, Petronas Refinery and Petrochemicals Integrated Development earthworks at 500 million ringgit, Kinrara-Damansara Expressway Highway worth 1 billion ringgit, and two upcoming coal-fired plants totalling 3,000MW.

In the fourth quarter of 2012 domestic contracts awards totalled RM3.2bil, a 43.1% increase year-on-year.

However, on a quarter-to-quarter basis, the quarter's domestic contract awards fell 42.5%, in line with analysts' expectations. "We highlighted that the fourth quarter (2012) will likely see a quarter-on-quarter contraction as most of the mass rapid transit (MRT) packages were dished out between the first and third quarter," said Goh.

For 2012, total domestic contracts stood at RM27.9bil, brought about by the RM8.3bil MRT tunnelling works, which were awarded in the second quarter. Domestic contracts for the full year represented a 135.4% growth from a year ago.

Without the MRT tunnelling jobs, domestic contracts amounted to RM19.6bil, still a 65.6% increase from the previous year.

"At RM19.6bil, domestic contracts were within our 2012 target range of RM18bil-RM20bil," Goh said.

Analysts remain overweight on the construction sector in light of the looming general election, which is expected to be held by April.

"Despite these positive sector fundamentals, the KL Construction (KLCon) index actually underperformed the FBM KLCI by 14.5% last year. The key culprit, we believe, was that investors remained spooked by election risk' given the impending general election," Goh said.

He believes a re-rating for the sector would be called once general election has been held. "Our top picks remain Gamuda Bhd and Mudajaya Group Bhd," Goh said.

"We believe the risk of the general election has been largely priced into the sector's share price given the underperformance since 2011 and widening valuation gap versus the KLCI," said Soon.

Among risks the sector may face is execution risk, regulatory and political risk, rising raw material prices and an unexpected downturn in the construction and property sector.

Construction gross domestic product (GDP) growth remained strong in the third quarter at 18.3%.

"We expect full-year 2012 growth to come in at 19% and forecast 2013 growth at 11.5% amid a higher base," he said.

Meanwhile, foreign contracts for 2012 stood at RM5bil, representing a 68% year-on-year increase, and made up for 15.3% of the total contract awards.

"We do not expect a significant increase in the proportion of foreign contracts for 2013 as most contractors continue to focus their resources domestically," Goh said.

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