Sentiment on domestic construction industry has been boosted by positive newsflow and we opine that the worst is over for the industry. ECRL will resume with lower construction costs and rerouting. Separately, MyHSR corporation plans to appoint a technical advisory consultant to review the technical aspects of HSR project’s cost reduction options and this sparked revival hopes of the project. Maintain NEUTRAL sector rating as we deem YTD surge in construction counters has reflected the positive sentiment. In terms of TP changes, we maintain HOLD for both Gkent and IJM but upped TP to RM1.41 and RM2.30 respectively.
Signs of revival. Sentiment on the domestic construction industry has been boosted by positive newsflow such as (i) resumption of ECRL project; (ii) revival of 121 infrastructure projects (RM13.9bn) offered through direct negotiations and limited tenders by the previous government after cost review; (iii) potential revival of HSR and (iv) approval of high-impact projects under mid-term review of 11th Malaysia Plan such as Kulim airport (RM1.6bn), logistics and manufacturing hub in Sidam (RM300m) and construction of Phase 1A and 1B of the Northern Corridor Expressway (RM1.7bn). Although we do not expect the domestic construction industry prospects to go back to where it was during the period of pre-GE14, we opine that the worst is over for the industry.
ECRL. Last Friday, the Government has signed a supplementary agreement with China Communications Construction Company Ltd (CCCC) which allows the ECRL project to resume. The construction costs of the project have been brought down to RM44bn (from RM66bn) and reset of completion date to 2026 (from 2024). The project has been rerouted through Negri Sembilan, bypassing Gombak and Bentong as planned earlier. More details would be available on press conference later today. Potential beneficiaries of resumption of this project are Gamuda, IJM, HSSEB (non rated), AQRS (non-rated), Econpile (non-rated) and Advancecon (non-rated).
HSR. MyHSR corporation plans to appoint a technical advisory consultant to review the technical aspects of HSR project’s cost reduction options and this has sparked revival hopes of the project. To recap, the project has been suspended until May 2020. Nonetheless, we opine that the probability of revival of HSR project is lower than that of ECRL given its larger project costs (RM60-70bn) and lower compensation amount (RM500m). Should the project revival materialise, we reckon that interest would be on Gamuda and MRCB which was previously appointed as the PDP.
Sarawak. Job flows in Peninsular Malaysia slowed down significantly post GE14. We understand that industry players are aiming for jobs in Sarawak as state government has allocated c.RM9bn for development expenditure under state budget 2019 which is the biggest in the history of the state. Funding for those projects is expected to come from Sarawak’s state reserves (c.RM31bn) which may insulate the projects from risk of reduction of federal government spending. The momentum of project flows should also gain traction as the next state elections must be held before Sept 2021.
Maintain NEUTRAL. Maintain NEUTRAL on construction as we expect the domestic construction industry landscape to remain challenging despite signs of recovery on the industry. This is because we expect lower normalized construction margin going forward due to more competitive bidding and tight government budget. Moreover, YTD surge of construction counters’ share price (KLCON index +33.3%) has reflected the positive sentiment. Nonetheless, decent orderbook levels (average cover ratio of 2.9x) following the robust job flows in the past 2 years coupled with recent positive newsflow signifies that worst is over for the industry.
Stock Call Changes
George Kent – Maintain HOLD With Higher TP of RM1.41
We maintain Hold rating for GKent with higher SOP-driven TP of RM1.41 (from RM1.10) as we opine that the worst is over for domestic construction industry and hence bear case scenario valuation for the company’s construction division no longer applicable. As such we revise our valuation method for GKent’s construction division to P/E based instead of NPV. 8x P/E multiple is pegged to the FY20 construction segmental profits.
IJM – Maintain HOLD With Higher TP of RM2.30
IJM is one of the major beneficiaries of potential revival of ECRL with higher local content as a leading domestic contractor. Moreover, lifting of bauxite moratorium would boost Kuantan port throughput going forward. As a result we reduce our SOP discount to 30% (from 40%) to reflect brighter near term outlook. Maintain HOLD with higher SOP driven TP of RM2.30 (from RM1.97). SOP value for IJM is RM3.28.
Source: Hong Leong Investment Bank Research - 15 Apr 2019