Contract awards are expected to remain strong in 2H16 with the expected roll out of the RM5.3bil SUKE and RM4.2bil DASH highways, and the RM9bil Light Rail Transit Line 3 (LRT3) projects.
KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research's investment thesis is to stay Overweight on construction as 2016 is already a record year for contract flows.
It said on Tuesday for the large cap contractors, it highlights Gamuda (Buy, TP: RM5.65) as its top pick given its expected earnings resurgence from the rollout of the Mass Rapid Transit 2 (MRT2).
“We also like WCT (Buy, TP: RM2.12) as we believe it is set to witness a reversal of fortunes. The impending listing of its construction arm and REIT are tell-tale signs that a positive earnings momentum is forthcoming,” it said.
For the small caps, HLIB Research likes Mitrajaya (Buy; TP: RM1.88) which should see a revival of job wins this year, coupled with an 11% 3-year earnings CAGR at undemanding valuations.
To recap, the research house said in 2Q16, domestic contract awards to listed contractors amounted to RM8bn (+73% on-year, -73% on-quarter). The strong on-year jump was a result of several MRT2 viaduct and related contracts awarded totalling RM4.9bn.
However, the steep -73% on-quarter decline in domestic job flows was due to the high base in 1Q16 as a result of the MRT2 underground works (RM15.5bil) awarded to the MMC-Gamuda JV. Stripping this out, the on-quarter decline would be less drastic at -44%.
Apart from the MRT2 underground works, the high base in 1Q16 was also due to the Pan Borneo Highway (RM3.2bil) and Setia-Pantai Expressway (RM3.7bil).
HLIB Research said the 1H16 domestic contract awards totalled RM37.7bil, increasing by more than three-folds on-year. Despite only being at mid-year, this amount has already surpassed all prior full year figures, making it a record year.
“Even if we were to remove the impact of the MRT2 underground contract, 1H16 numbers would still register a robust +153% on-year growth.
“We expect the following contracts to be rolled out in 2H16: (i) six viaduct packages for the MRT2 (RM7bil to RM8bil), (ii) eight packages of the Pan Borneo Sarawak (RM10bil to RM12bil), (iii) urban highways such as the DASH (RM4bil) and SUKE (RM4bil) and (iv) LRT3 (RM9bil).
“There should also be a good flow of building jobs up for grabs driven by catalytic developments within the Klang Valley such as Tun Razak Exchange, Kwasa D’sara, Bukit Bintang City Centre, Cyberjaya City Centre and Bandar Malaysia.
“Foreign contract awards for 2Q16 stood at RM788mil (+53% on-year, +167% on-quarter). The figure for 1H16 totalled RM1.1bil, declining -57% on-year as most contractors continue to focus locally given the abundance of jobs up for grabs,” it said.
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