Maintain overweight: We have turned positive on the construction sector as there is now even more urgency for the government to expedite the rollout of various public projects to pump-prime the local economy to shield it against the increased risk of the global economy slipping into a double-dip recession.
MRT Co is expected to start calling for tenders for the 18 above-ground MRT work packages between now and December 2012 valued at RM12 billion-RM13 billion. If all packages are rolled out as planned over the next 15 months, we believe there will be enough jobs to go around in the local construction sector over the short to medium term.
On the other hand, the tender for the tunnelling package worth about RM7 billion-RM8 billion is expected to be called by 4Q11, with the contract award expected to happen by late 1Q12. There is a possibility that MMC-Gamuda JV may have to settle for lower margins from the MRT tunnelling package assuming that they will have to match a low winning bid presumably of Chinese contractors pursuant to the "Swiss Challenge". However, we believe it could still optimise to improve profitability.
We are revising down indicative fair values for construction stocks under our coverage by 10%-28%, having moderated our one-year forward target price-earnings ratio (PER) for the construction sector to 10-14 times (from 12-16 times previously).
Risks to our view include: (1) The government is to revert to austerity drive to rein in the budget deficit; (2) Potential hiccups in the rollout of public projects; and (3) The less-than-robust overseas construction markets, particularly, the Gulf states.
No changes in "outperform" for Gamuda Bhd, TRC Synergy Bhd, Hock Seng Lee Bhd, Eversendai Corp Bhd and Fajarbaru Builder Group Bhd, "trading buy" for MRCB, "market perform" for WCT Bhd and "underperform" for IJM Corp Bhd. Our top picks for the sector are Gamuda (FV=RM3.41) and TRC (FV=RM0.71). — RHB Research, Oct 3
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