Construction - Buoyed By The MRT

We remain OVERWEIGHT on the construction sector despite a subdued 2QFY13 amid increasing risk of certain high-profile mega projects being rescheduled  as  the  Government  steps  up  efforts  to  narrow  the country’s  fiscal  deficit.  We  are  comforted  by  the  Government’s assurance and firm commitment towards the Klang Valley MRT project, which by itself will keep the sector buoyant until 2017. 

- Generally subdued 2QFY13. The latest quarterly results of construction companies were generally subdued, largely due to slow billings from new jobs  and  variation  orders  (VO),  cost  pressure  and  the  recognition  of certain  lumpy  negative  items.  Out  of  the  11  construction  companies under  our  coverage  that  reported  results,  three  missed  expectations while eight met our forecasts.

- MRT  unscathed;  sector  okay.    The  current  construction  upcycle  is underpinned  largely  by  the  MYR73bn  Klang  Valley  MRT  project.  Given the  scale  of  this  project,  its  impact  can  be  felt  along  the  entire  value chain  of  the  sector.  While  other  mega  projects  in  the  pipeline  also generate  work,  their  impact  is  much  more  limited.  In  other  words,  the local  construction  sector  will  continue  to  do  well  as  long  as  the  Klang Valley MRT project is intact. As such, we would be unfazed if one or two, or  even  more  mega  projects,  are  deferred. Our key “intact” test now is the Cabinet approval for Line 2 by the end of the year.

- Maintain  OVERWEIGHT.  The  construction  sector’s  prospects  are strong,  buoyed  by  the  MYR73bn  Klang  Valley  MRT  project  as  well  as other  on-going  and  shovel-ready  mega  projects.  We  advocate  a  two-pronged  stock-picking  strategy,  i.e.  going  for:  i)  high-beta  highly  liquid big-cap Gamuda (GAM MK: BUY, FV: MYR5.45) that will take the lead in terms of  reaction  to  new  price  catalysts  such as  the  Cabinet’s  approval for Line 2 of the Klang Valley MRT project, etc; and ii)  undervalued and under-researched  mid-  and  small-cap  stocks  such  as  Pintaras  (PINT MK,  BUY,  FV:  MYR7.00)  (for  good  piling  rates  on  capacity  shortage  in the market), and Naim (NHB MK: BUY, FV: MYR5.63) as well as Ahmad Zaki (AZR MK, BUY, FV: MYR1.33), which are trading at huge discounts to their break-up value.