Construction sector

Maintain positive: Job award momentum is expected to pick up again in the second half of 2017 (2H17) and into 2018. Earnings delivery of construction players with robust order books would be in the limelight as major infrastructure project progress accelerates.

Our sector top “buy” pick is IJM Corp Bhd as a direct proxy to growing Chinese investments in Kuantan through the Malaysia-China Kuantan Industrial Park and Kuantan Port. SCGM Bhd is our mid-cap pick as the only pure major construction stock with strong earnings visibility and potential for higher order book replenishment.

1H17 could have seen a slower pace of infrastructure job awards after hitting a high of RM88 billion in 2016. Based on historical trends, we should see 2H17 infrastructure job awards picking up, expecting the major packages of the Klang Valley light rail transit 3 (estimated RM9 billion) to kick-off first.

Maiden packages of the East Coast Rail Link (estimated RM55 billion) and the Gemas-Johor Bahru double track rail (estimated RM9 billion) should be awarded as well. The tabling of Budget 2018 slated for October 27, 2017 is a key event to reaffirm infrastructure development with financing from direct government development expenditure and off the government’s balance sheet.

With robust outstanding order books and decent order book cover ratios, we believe earnings delivery could be a further rerating catalyst for the sector. We expect companies with exposure to the Klang Valley mass rapid transit 2 (Gamuda Bhd, IJM, and SCGM within our coverage) to report relatively stronger earnings as work progress accelerates from 2H17. — Maybank Investment Bank Research, July 20

This article first appeared in The Edge Financial Daily, on July 24, 2017.

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