Maintain overweight: The final leg of Vision 2020. This year marks the beginning of the 11th Malaysia Plan (11MP) which is arguably the most critical Malaysia Plan as it ends in 2020, the target timeline for the country to achieve a “high income nation” status. Allocation for the 11MP is set at RM260 billion, a 13% increase from the 10MP.
Despite the strong 21% jump in development expenditure last year, the allocation of RM50 billion (up 6% year-on-year [y-o-y]) for 2016 continues to exhibit growth. This is positive given the strong correlation (76%) between nominal construction output and development expenditure. Our economics team expects the outperformance of construction to persist in 2016 at 10% against a softer gross domestic product growth of 4.5%.
We expect 2016 to potentially break the previous high in 2012 at RM28 billion. We expect 2016 to witness the awarding of several large contracts which will sustain job flows all year round.
This should start off with the light rail transit line 3 (LRT3,RM9 billion) in the first quarter (1Q), mass rapid transit line 2 (MRT2, RM28billion) in 2Q, The Damansara-Shah Alam Elevated Expressway (DASH, RM4 billion) and Sungai Besi-Ulu Klang Elevated Expressway (SUKE, RM4 billion) in 3Q and potentially the revival of the Southern Double Track (RM8 billion) in 4Q.
We retain our overweight rating on construction as there is a very plausible likelihood of 2016 being a record year for contract flows.
From a price-to-book value perspective, valuations are a bargain with the KLCON Index trading at 0.9 times. The last time the KLCON traded below book was during the 2008-2009 global financial crisis.
IJM Corp Bhd (buy, target price [TP]: RM3.86) is our top pick among the large cap contractors given its record high order book of RM6.7 billion which boasts a superior cover ratio of 7.5 times.
For the small caps, we like Mitrajaya Holdings Bhd (buy, TP: RM1.52) which has a strong earnings compound annual growth rate of 24% for FY15-FY17 and potential to ramp up job wins this year.
We also highlight Sarawak Cable Bhd (buy, TP: RM2.57) which should be in favour this year as a Sarawak election play.
Broadly similar to Cahya Mata Sarawak Bhd, Sarawak Cable offers a ticket to Sarawak’s growth theme but at price-earnings ratio valuations that are 50% cheaper.
This article first appeared in The Edge Financial Daily, on January 11, 2016. Tap here to subscribe for your personal copy.