Construction - Risks from Budget cuts removed
Recommendation: Over Weight
The Prime Minister's speech on the revised Budget 2015 today contained good news for the overall sector- the RM49bn development expenditure (DE) is intact despite the fall in oil prices. This confirms our stance that the government would keep public transport and other major infra contracts as priorities. This news should remove the overhang on construction share prices, most of which have declined since late-2014 due to fears of a major cutback in infra spending. We recommend investors to be selective. Gamuda remains our top big-cap pick due to its exposure to the MRT and Penang transport infra projects. Muhibbah continues to be our preferred small/mid-cap stock in view of the pending awards from Rapid and Pengerang. Maintain Overweight.
What happened
Prime Minister (PM) Najib Razak’s special address today clarified the status of Budget 2015, the structure of which was based on an oil price of US$100/barrel. The key points of the speech were: 1) the government will maintain and spend the development expenditure budget of RM49bn for 2015, 2) the amount will be used for public housing, flood mitigation, water supply and electricity projects, 3) the amount will also be used for public transport infrastructure projects such as the Pan-Borneo Highway, and 4) the projects in Rapid and Pengerang will be implemented.
What We Think
In our view, the PM's confirmation that directly-funded government-initiated projects under Budget 2015 will be implemented clears lingering concerns about possible delays and cancellations. This is positive for approved rail jobs, mainly the RM23bn-25bn MRT 2 and RM9bn LRT 3, both of which were scheduled for implementation in 2015. There was no mention of new highway projects but we gather that the implementation plans for these jobs would be privately-funded and should pick up pace as the year progresses. The PM's text highlighted an RM800m immediate allocation to rehabilitate the East Coast areas damaged by the recent floods (total damages estimated at c.RM2.9bn). The unchanged RM27bn budget for the Pan-Borneo Highway was a positive surprise, as we had suspected that this project could be deferred.
What You Should Do
Investors should be selective and accumulate Gamuda for exposure to MRT 2 and potential appointment as Project Delivery Partner (PDP) for the RM27bn Penang transport master plan. Investors should also accumulate Muhibbah, as it offers value and is likely to re-rate pending potential recovery in infra awards from Rapid and Pengerang.
Source: CIMB Daybreak - 21 January 2015
Recommendation: Over Weight
The Prime Minister's speech on the revised Budget 2015 today contained good news for the overall sector- the RM49bn development expenditure (DE) is intact despite the fall in oil prices. This confirms our stance that the government would keep public transport and other major infra contracts as priorities. This news should remove the overhang on construction share prices, most of which have declined since late-2014 due to fears of a major cutback in infra spending. We recommend investors to be selective. Gamuda remains our top big-cap pick due to its exposure to the MRT and Penang transport infra projects. Muhibbah continues to be our preferred small/mid-cap stock in view of the pending awards from Rapid and Pengerang. Maintain Overweight.
What happened
Prime Minister (PM) Najib Razak’s special address today clarified the status of Budget 2015, the structure of which was based on an oil price of US$100/barrel. The key points of the speech were: 1) the government will maintain and spend the development expenditure budget of RM49bn for 2015, 2) the amount will be used for public housing, flood mitigation, water supply and electricity projects, 3) the amount will also be used for public transport infrastructure projects such as the Pan-Borneo Highway, and 4) the projects in Rapid and Pengerang will be implemented.
What We Think
In our view, the PM's confirmation that directly-funded government-initiated projects under Budget 2015 will be implemented clears lingering concerns about possible delays and cancellations. This is positive for approved rail jobs, mainly the RM23bn-25bn MRT 2 and RM9bn LRT 3, both of which were scheduled for implementation in 2015. There was no mention of new highway projects but we gather that the implementation plans for these jobs would be privately-funded and should pick up pace as the year progresses. The PM's text highlighted an RM800m immediate allocation to rehabilitate the East Coast areas damaged by the recent floods (total damages estimated at c.RM2.9bn). The unchanged RM27bn budget for the Pan-Borneo Highway was a positive surprise, as we had suspected that this project could be deferred.
What You Should Do
Investors should be selective and accumulate Gamuda for exposure to MRT 2 and potential appointment as Project Delivery Partner (PDP) for the RM27bn Penang transport master plan. Investors should also accumulate Muhibbah, as it offers value and is likely to re-rate pending potential recovery in infra awards from Rapid and Pengerang.
Source: CIMB Daybreak - 21 January 2015
