Construction stocks could be back in favour, says CIMB Research

 Construction stocks could be back in favour, says CIMB Research
Tuesday, 3 Apr 20188:33 AM MYT

KUALA LUMPUR: CIMB Equities Research is retaining its overweight outlook on the construction sector with Gamuda, MRCB, YTL Corp and Muhibbah Engineering as its favourites.

The research house said on Tuesday it believes construction stocks could be back in play. The current low share price levels from Jan’s peaks present a good re-entry point.

“We like Gamuda for its extensive rail tenders, MRCB for its election-play and highway divestment angle, YTL Corp for its massive order book upside, and Muhibbah Engineering for its attractive valuations and lucrative airport earnings.

“Key sector risk is a real disruption in job replenishment prospects brought about by the emergence of foreign contractors,” it said.

CIMB Research said high-beta construction stocks were among the least favoured in 1Q18, with the KL Construction Index falling 9% year-to-date, weighed down by the global stock market sell-down.

Share prices of contractors under its coverage took a hit, with a 16% decline from the “pre-election rally” peaks in January and down 6% year-to-date.

The recent 4Q17 results season in February and low contract awards year-to-date also contributed to the decline share prices of contractors. This was despite good earnings visibility and high orderbooks from 2017’s wins.

“The sector’s contracts outlook is still looking robust, as the government pushes on with the implementation of new public infra projects (Klang Valley tram, Sarawak LRT) and roll out the backlog of water infra capex.

“The concurrent timing of tender evaluations of other new mega rail contracts would only mean that contract flows are bound to regain strong momentum in the coming months.

“We believe 2Q18 could be the start of a revival of sector drivers for rail and other segments, including water infra, roads and housing,” it said.

CIMB Research said the evaluation of contract tenders for the ECRL, MRT 3 and HSR since 3-6 months ago was expected to shift into award phase this year.

It said it would keep an eye on 1) potential five major civil works packages from the ECRL (2nd phase procurement), 2) the turnkey/EPCC award for MRT 3 (Circle Line), and 3) PDP award for the HSR projects.

All three major packages are due for awards over the next nine months. The upcoming General Elections (GE) could accelerate the Pan Borneo Highway (Sabah) project.

“We see value emerging from the recent 2%-22% pullback in the share prices of Gamuda, MRCB, Muhibbah Engineering, Protasco and YTL Corp from Jan peaks; they now offer 16%-51% potential upside to target prices.

“Construction stocks under our coverage now trade at a 22%-30% discount to RNAV for the big caps, and 33%/upto-60% discounts to RNAVs for the small/midcaps, with an average CY18 average P/E of 13 times compared to the historical upcycle average P/E of 16-18 times,” it said.