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AmResearch: Construction sector still overweight

Construction sector
Maintain overweight: The federal government is studying a proposal to extend the new light rail transit (LRT) line between Kota Damansara and Cheras to Sungai Buloh and Kajang, according to reports.

The first additional route is Kota Damansara to KTMB station in Sungai Buloh (3km). This is to provide better integration with the northern commuter train services. The second is Cheras to Kajang (9km), which facilitates the integration of the new line with KTMB’s commuter services from the south.

The third is an additional line from Uptown Damansara Utama to Kelana Jaya (4km) to overcome traffic congestion along the Lebuhraya Damansara-Puchong.

Although not entirely a surprise, we take a mildly positive stance on this piece of news. While the Cheras-Kota Damansara project has yet to be officially endorsed by the federal government, we gather that the project stands a good chance of taking off due to its significant economic linkages to the Malaysian economy.

Moreover, the proposed extensions could be crucial to the federal government’s ambitious plans to develop 3,000 acres (1,214ha) of land in Sungai Buloh into a new hub within the Klang Valley in our view.

We estimate that the original 43km-long Cheras to Kota Damansara LRT line costs between RM8 billion and RM9 billion. The additional 16km route extending to Sungai Buloh and Kajang would increase the total length of the new line to 59km. This would suggest some further upside to the project’s contract value and scope of works.

Furthermore, construction works are scheduled to commence from the middle of this year, which means it could be ahead of its completion within three years. Taken together, the latest developments validate our earlier views that progress on the two major LRT jobs are gathering momentum.

Going by track record, we believe the UEM Group, Gamuda Bhd and IJM Corp Bhd are among front runners for the LRT jobs.

We maintain our overweight stance on the construction sector and expect a re-acceleration of contract flows ahead of the 10th Malaysia Plan which is scheduled to be unveiled in June, on top of a recovery in construction margins and gradual revitalisation of order flows abroad, notably in India, the Middle East and Vietnam.

For exposure to the sector, we continue to like IJM, Gamuda, WCT, Naim Holdings Bhd and Hock Seng Lee. — AmResearch, April 9

This article appeared in The Edge Financial Daily, April 12, 2010.

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