More upgrades for builders

KUALA LUMPUR: After a sluggish first quarter, a likely pick-up in large-scale projects in the second half (2H) and improving margins may invite earnings upgrades and better recommendations for construction counters.

The latest upgrade in the industry was perhaps that for IJM Corp Bhd, the nation’s largest builder in terms of market capitalisation.

RHB Research Institute in a note last Friday (March 26) upgraded IJM Corp’s net profit forecasts for the financial years 2011 and 2012 (ending March 31) by 15% and 4%, indicative fair value by 30% to RM4.88 from RM3.76, and its recommendation to market perform from underperform.

IJM Corp, via its wholly owned Road Builder (M) Sdn Bhd, recently secured a contract worth RM600 million from Besraya (M) Sdn Bhd for an extension work on the Sungai Besi Highway. The construction period is 36 months.

IJM Corp had said it aimed to secure at least RM2 billion worth of jobs this year, and is planning a more aggressive campaign to win jobs in India.

Since March 17, the counter has had four buy, one hold, one market perform and one neutral calls. It is trading at about 21 times earnings.

The better job prospects and improving construction margins would also encourage further upward re-rating on IJM Corp’s peers Gamuda Bhd and WCT Bhd.

WCT’s latest upgrade was on March 1, by TA Securities, due to better outlook and financials. The house raised its recommendation on the counter to buy with a fair value of RM3.04.

Maybank Investment Bank (Maybank IB) said in a note that WCT should see record earnings this year at RM168 million, up 15% year-on-year, while job win prospects were positive with the impending award of major domestic infrastructure works and contracts in the Middle East.

WCT posted a net profit of RM147.09 million for the fourth quarter ended Dec 31, 2009, which was slightly better than market consensus of RM142.6 million.

Maybank IB noted that WCT, the third-largest builder in terms of market size, has revised its internal target for new contracts in 2010 to RM2 billion from RM1.5 billion, reflecting growing optimism.

Since the beginning of the month, the counter has had five buy, one outperform and one underperform calls with a target price consensus of RM3.04. It is trading at about 15 times PE.

As for Gamuda, its latest upgrade was in January, by Deutsche Bank. The firm raised its recommendation on the counter from hold to buy with a target price of RM3.30.
Gamuda, the second-largest construction firm in the country, saw construction pre-tax margin expand by 1.4% to 4% quarter-on-quarter in its second quarter ended Jan 31, 2010.

By comparison, IJM Corp saw a marginal improvement in 3Q2010 construction margin to 2.2% from 1.4% in 2Q2010.

Gamuda’s better margin was due to further progress in the Ipoh-Padang Besar double-tracking rail project and Yenso infrastructure jobs.

Maybank IB said in a note that after five consecutive quarters of sub-3% pre-tax margins, it expected further margin expansion in the coming quarters and forecast the company’s pre-tax margin to reach 4.8% in the fiscal year ending July 31, 2010.

CIMB Research, meanwhile, estimated that Gamuda should end the year with about 6% pre-tax margin, almost doubling that of 3.3% achieved in the first half of FY2010.

The better margins are a relief for the division, which has seen a number of tenders either postponed or awarded to others, such as the Hulu Terengganu Dam job, which was awarded to the Sinohydro-Loh & Loh joint venture.

Also note that Gamuda has put in a RM10.8 billion bid for Selangor’s water assets, in an attempt “to break the deadlock in the industry’s long-overdue consolidation”.

Since March 26, the counter has had five buy, two outperform, one trading buy, one neutral and one sell recommendations, with target price consensus at RM3.21. It is trading at about 26 times earnings.

RHB also sees value in small-cap and mid-cap construction stocks and upgraded its recommendation on the construction sector from underweight to neutral.

CIMB, meanwhile, expects the construction sector to expand 4.2% this year, compared with 5.4% in 2009.

It expects the conducive raw material price environment to accommodate better pricing of jobs and translate into reasonable margins for contractors.

Of the sizeable projects to be farmed out this year, the final component of the low-cost carrier terminal (LCCT), valued at RM1.3 billion, is expected to be announced some time this week, according to sources.

WCT and Sunway Holdings Bhd are among the 15 bidders for the LCCT project.

Other upcoming jobs include the upstream portion of the RM2.5 billion Pahang-Selangor Inter-state raw water transfer project, and infrastructure works in Sarawak, including the

Murum and Nanga Merit access roads worth some RM2.1 billion.

Come June, contractors can expect more jobs to be dished out under the 10th Malaysia Plan, the expenditure for which is projected at RM180 billion.

This article appeared in The Edge Financial Daily, March 29, 2010.

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