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Construction: Reasons to be patient

Construction sector
Maintain overweight:
The construction sector has yet to perform (KL Construction Index: +0.2% year-to-date versus KLCI: +2.7%) on slow award flows. Although frustrating, we believe the issue is timing rather than project cancellations. The Klang Valley Light Rail Transit (LRT) extension Package B is in the final stage of award which should be good news. And last week's game changer was the signing of Bakun's electricity sale, bringing clarity to new infrastructure works in Sarawak. Our top pick is Gamuda Bhd, followed by WCT Bhd and Hock Seng Lee Bhd (HSL).

Except for IJM Corp, results of all other construction groups under our coverage were within our expectations. Combined core net profit was down 1.9% year-on-year and 7.4% quarter-on-quarter. The sequential slowdown was expected as 1Q has seasonally been slow due to the weather and Chinese New Year break. The y-o-y contraction came from IJM Corp and Sunway. Core construction margins inched up. IJM Corp's RM124 million provisions and project losses in the construction business were larger than our anticipated RM70 million.

Award flows have been dismal in the first five months. With the exception of IJM Corp's West Coast Expressway (WCE) and New Pantai Expressway (NPE) extension concessions, and Tenaga Nasional Bhd's new 1,000MW power plant capacity at Manjung, Perak, there was no major news flow. Gamuda and WCT did not win any jobs, while IJM Corp added on RM300 million, Sunway RM370 million, and HSL RM108 million. Even WCE and NPE extension announcements relate to just letters of intent for the concessions; they have yet to progress to works awards.

The LRT Package B could be awarded by the end of this month. The Mass Rapid Transit system (MRT) elevated structure works package has passed the contractors' pre-qualification stage. We expect the tenders to start in early 2H11 with awards by year-end. Mudajaya has clinched the subcontractor's role for Manjung's Phase 4 civil works package worth RM720 million; next to be awarded should be the mechanical and structure package. By early October, there should be clearer visibility on the timelines for the start of works for the WCE and NPE extension concessions.

Last week's inking of a 30-year power purchase agreement (PPA) between Sarawak Hidro (a unit of the federal government) and Sarawak Energy (state government-owned) is significant. We had anticipated the matter to be resolved by 1H11, as highlighted in our 2011 market strategy. This, we believe, will be a game changer for Sarawak's construction landscape. Developments at the Sarawak Corridor of Renewable Energy (Score) have been slow to take off as electricity supply to run targeted energy-intensive industries has been uncertain pre-Bakun. The PPA will kick start Score meaningfully, driving new infrastructure needs. — Maybank IB Research, June 6

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