Construction - Pursuing the 10MP agenda (3Q2010 outlook)

CONSTRUCTION - Pursuing the 10MP agenda

More jobs under 10MP, positive macro outlook. The 52 high-impact public-private partnership (PPP) projects worth RM63b announced during the 10MP reinforced our POSITIVE view on the sector.

Among the high valued projects are the high-capacity mass rapid transit (MRT) system valued at RM36bn, the construction of seven highways valued at RM19b, development of Malaysian Rubber Boards's 3,300- acre land in Sungai Buloh valued at RM10b and the two-coal fired power plants valued at RM7b. Also, the current favourable macro outlook is also benefiting the construction sector.

With our in-house forecast of GDP to grow by more than 6.0% in 2010 as compared to -0.7% in 2009, we are confident that the construction sector will have a multiplier effect that will help other sectors to grow concurrently.

RM3b worth of jobs todate. In 1H10, more than RM3.0b jobs were awarded to the local contractors. These jobs include:

• RM291m LCCT package 2 to Gadang;
• RM828m HuluTerengganu Dam project to the Loh&Loh-Sinohydro JV;
• IJM's RM600m for the Besraya extension;
• RM333m Paya Beda Dam to JAKS;
• RM247m Murum dam access roads to IJM;
• IJM's RM350m Batu Kawan Expressway for the 2nd Penang Bridge.

We expect more projects to be awarded in 2H10, which include the remaining packages of the new LCCT, the LRT extension line (Kelana Jaya) and upstream portion of the Pahang-Selangor Inter-state Raw Water Transfer project coupled with infrastructure jobs in Sarawak.

All eyes on Sarawak.The State election is expected to be held by mid 2011. Thus, we expect speculative flavour among Sarawak-related stocks,as there will be more  infrastructure projects for rakyat such as road works, ports, bridges, schools, low-cost housing in East Malaysia.

Under the 10MP, the Federal government had also stated that there will be an allocation for two smelting plant projects in Similajau.

Moving forward, we expect more foreign direct investments in Sarawak in view of the development of SCORE. This would indirectly benefiting Sarawak construction companies as there is a need to support the development of heavy industries.

Maintain POSITIVE. With more projects on the ground, the outlook for the sector remains bright for the remaining months of the year.

Year-to-date, the KL Construction Index has surpassed the KLCI index with a 5.74% vs 2.22% gain, thanks to positive newsflow and stronger domestic economy.

Although most construction companies in our universe registered lower earnings vs our full year forecast during the recent 1QFY2010 results, we believe construction companies would be able to meet the forecasted earnings as traditionally more jobs will pick up in 2H of the year.

Although large-cap construction stocks are kept by high valuations, there is still room for growth on smallcap and mid-cap construction stocks.

Nevertheless, Gamuda still remains one of our top picks as the company was highlighted to be the front-liner for the proposed MRT project and also to clinch
the portion of the LRT extension line. Meanwhile, IJM has so far managed to secure more than RM1b projects in 1H10. We like Naim and Hock Seng Lee for Sarawak exposure.