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Today, we introduce our “Construction: Jobs Flow Tracker”, which seeks to measure the momentum of contract awards. Over the 1Q10 period, some RM2.85bn worth of jobs was awarded. Domestic contracts showed a healthy 16% y-o-y increase but contracted by 38% q-o-q due to the high base effect. We believe the domestic contract flow will exceed last year’s RM9.86bn, with better numbers showing up in the upcoming quarters. We maintain our OVERWEIGHT rating on Malaysian contractors.
Introducing our construction jobs flow tracker. As part of our pursuit of new investing ideas, we are introducing a quarterly publication of our “Construction: Jobs Flow Tracker” report. This report seeks to give investors a feel of the jobs flow and momentum within the construction universe. It will, in essence, highlight “what’s going on” and “who’s getting what”. After all, the prices of construction stocks hinge heavily on contract wins. One can regard this publication as being equivalent to the auto sector’s Total Industry Volume (TIV) or MPOB statistics for the plantation sector. We are confident that our first-in-the-market report will assist investors in making better informed decisions on construction stocks.
The methodology. The momentum of jobs flow to listed Malaysian contractors is compiled by tracking the contract awards announced on Bursa. The awards over a quarter are compared on a y-o-y and q-o-q basis. In making comparisons across time, we prefer a quarterly interval as shorter intervals (e.g. monthly) may give rise to exaggerated swings given that job awards tend to be lumpy. Also, jobs that are at the “Letter of Intent (LOI)” stage are not counted as there may be a long time lag before they reach the “Letter of Award (LOA)” stage.
The flaws. The weaknesses in our methodology in measuring contracts flow are: (i) failure to capture awarded but unannounced jobs, (ii) it does not take into account awarded and subsequently cancelled jobs (e.g. Meydan Racecourse), and (iii) possible double counting as a result of sub-contracting (i.e. the main contract and subcontract are announced).
Decent flow of contracts. During the 1Q10 period, a total of RM2.85bn worth of jobs was awarded, of which 65.2% is domestic based and 34.8% foreign. The average size per domestic job stood at RM169m, in line with one of our key sector themes for 2010 that jobs flow will be centred on the mid-small sized ones. Contract awards in Sarawak appear to be gaining traction, with Hock Seng Lee (NEUTRAL, TP: RM1.50, Downgrade given the share price run-up) and Naim (BUY, TP: RM4.21) collectively bagging RM245m worth of jobs. For the more “popular” jobs, Gadang (NR) secured the LCCT EW2 (RM291m) while IJM (NEUTRAL, TP: RM4.70) was finally awarded the RM600m Besraya extension after almost a year.
News flow during the quarter. Market talk is that the UEM-Bina Puri JV and privately held AHT Norlan-Carriage JV are the finalists for the LCCT terminal building (RM750-850m) and satellite tower (RM400-500m). Shortlisted contractors that did not make it were Sunway (NR), IJM and Gadang. The Government is also evaluating the proposal for a RM5-6bn highway parallel to the existing NSE connecting Banting (Selangor) and Taiping (Perak), which could eventually be extended all the way to Gelang Patah in Johor. We think the proposal makes little economic sense as the current NSE is not fully utilised (festive seasons excluded). Furthermore, the completion of the Double Track at end-2013 would already provide an alternative route,
especially for cargo flow. In East Malaysia, there are plans to construct an 11km bridge linking Sabah and Labuan, which could cost RM3bn (RM6bn if delayed). We are sceptical on the feasibility of this project as Labuan’s population is a mere 90,000. Recently, the 60:40 JV between Loh&Loh (NR) and Sinohydro received the LOI for the Hulu Terengganu Dam (RM828m). The other finalist for the job was Gamuda (NEUTRAL, TP: RM2.75).
Stronger domestic flow y-o-y. Domestic jobs awarded during the quarter amounted to RM1.86bn, up 15.6% y-o-y. This amount excludes the RM828m Hulu Terengganu Dam. We believe domestic contracts for 2010 can easily exceed the RM9.86bn awarded last year. Some of the “popular” projects that have yet to be dished out are the LRT extension (RM5bn ex land acquisition costs), remaining LCCT packages (RM1.35bn), Kelau dam (RM500m), Langat 2 (RM1.5-2bn) and Nangamerit road (RM1.2bn). Many contractors have also said they are working on some PFI-based jobs. We gather from our tracking that no PFI jobs were awarded last year. Of the foreign jobs, RM992m (-71.5%) worth of contracts were secured in 1Q10. The y-o-y decline was mainly due to the high base effect in 1Q09 as a result of the RM2.64bn Chhattisgarh IPP EP contract awarded to Mudajaya (BUY, TP: RM6.48) in February last year.
Quarterly comparison. Domestic jobs flow shrank 37.8% q-o-q from RM2.99bn in 4Q09, again due to the high base in the preceding quarter given the sizable RM1.66bn Manjung district cooling plant awarded to Linear Corp (NR) in December. We think the jobs momentum will pick up q-o-q in 2Q as the awards in 1Q are usually slower due to the festive season. While foreign contracts picked up strongly q-o-q, one must bear in mind that the 4Q09 job flows could have been adversely constricted by the Dubai crisis, which created ripple effects in the Middle East.
Maintain OVERWEIGHT. We retain our OVERWEIGHT rating on Malaysian contractors driven by expectations of more positive news flow. Our top picks are Mudajaya (BUY, TP: RM6.48) for its strong earnings growth and WCT (BUY, TP: RM3.08), as we believe more contracts are in the pipeline. We also like Naim (BUY, TP: RM4.21) for thematic Sarawak play but downgrade Hock Seng Lee (NEUTRAL, TP: RM1.50), owing to the recent run-up in its share price.
Introducing our construction jobs flow tracker. As part of our pursuit of new investing ideas, we are introducing a quarterly publication of our “Construction: Jobs Flow Tracker” report. This report seeks to give investors a feel of the jobs flow and momentum within the construction universe. It will, in essence, highlight “what’s going on” and “who’s getting what”. After all, the prices of construction stocks hinge heavily on contract wins. One can regard this publication as being equivalent to the auto sector’s Total Industry Volume (TIV) or MPOB statistics for the plantation sector. We are confident that our first-in-the-market report will assist investors in making better informed decisions on construction stocks.
The methodology. The momentum of jobs flow to listed Malaysian contractors is compiled by tracking the contract awards announced on Bursa. The awards over a quarter are compared on a y-o-y and q-o-q basis. In making comparisons across time, we prefer a quarterly interval as shorter intervals (e.g. monthly) may give rise to exaggerated swings given that job awards tend to be lumpy. Also, jobs that are at the “Letter of Intent (LOI)” stage are not counted as there may be a long time lag before they reach the “Letter of Award (LOA)” stage.
The flaws. The weaknesses in our methodology in measuring contracts flow are: (i) failure to capture awarded but unannounced jobs, (ii) it does not take into account awarded and subsequently cancelled jobs (e.g. Meydan Racecourse), and (iii) possible double counting as a result of sub-contracting (i.e. the main contract and subcontract are announced).
Decent flow of contracts. During the 1Q10 period, a total of RM2.85bn worth of jobs was awarded, of which 65.2% is domestic based and 34.8% foreign. The average size per domestic job stood at RM169m, in line with one of our key sector themes for 2010 that jobs flow will be centred on the mid-small sized ones. Contract awards in Sarawak appear to be gaining traction, with Hock Seng Lee (NEUTRAL, TP: RM1.50, Downgrade given the share price run-up) and Naim (BUY, TP: RM4.21) collectively bagging RM245m worth of jobs. For the more “popular” jobs, Gadang (NR) secured the LCCT EW2 (RM291m) while IJM (NEUTRAL, TP: RM4.70) was finally awarded the RM600m Besraya extension after almost a year.
News flow during the quarter. Market talk is that the UEM-Bina Puri JV and privately held AHT Norlan-Carriage JV are the finalists for the LCCT terminal building (RM750-850m) and satellite tower (RM400-500m). Shortlisted contractors that did not make it were Sunway (NR), IJM and Gadang. The Government is also evaluating the proposal for a RM5-6bn highway parallel to the existing NSE connecting Banting (Selangor) and Taiping (Perak), which could eventually be extended all the way to Gelang Patah in Johor. We think the proposal makes little economic sense as the current NSE is not fully utilised (festive seasons excluded). Furthermore, the completion of the Double Track at end-2013 would already provide an alternative route,
especially for cargo flow. In East Malaysia, there are plans to construct an 11km bridge linking Sabah and Labuan, which could cost RM3bn (RM6bn if delayed). We are sceptical on the feasibility of this project as Labuan’s population is a mere 90,000. Recently, the 60:40 JV between Loh&Loh (NR) and Sinohydro received the LOI for the Hulu Terengganu Dam (RM828m). The other finalist for the job was Gamuda (NEUTRAL, TP: RM2.75).
Stronger domestic flow y-o-y. Domestic jobs awarded during the quarter amounted to RM1.86bn, up 15.6% y-o-y. This amount excludes the RM828m Hulu Terengganu Dam. We believe domestic contracts for 2010 can easily exceed the RM9.86bn awarded last year. Some of the “popular” projects that have yet to be dished out are the LRT extension (RM5bn ex land acquisition costs), remaining LCCT packages (RM1.35bn), Kelau dam (RM500m), Langat 2 (RM1.5-2bn) and Nangamerit road (RM1.2bn). Many contractors have also said they are working on some PFI-based jobs. We gather from our tracking that no PFI jobs were awarded last year. Of the foreign jobs, RM992m (-71.5%) worth of contracts were secured in 1Q10. The y-o-y decline was mainly due to the high base effect in 1Q09 as a result of the RM2.64bn Chhattisgarh IPP EP contract awarded to Mudajaya (BUY, TP: RM6.48) in February last year.
Quarterly comparison. Domestic jobs flow shrank 37.8% q-o-q from RM2.99bn in 4Q09, again due to the high base in the preceding quarter given the sizable RM1.66bn Manjung district cooling plant awarded to Linear Corp (NR) in December. We think the jobs momentum will pick up q-o-q in 2Q as the awards in 1Q are usually slower due to the festive season. While foreign contracts picked up strongly q-o-q, one must bear in mind that the 4Q09 job flows could have been adversely constricted by the Dubai crisis, which created ripple effects in the Middle East.
Maintain OVERWEIGHT. We retain our OVERWEIGHT rating on Malaysian contractors driven by expectations of more positive news flow. Our top picks are Mudajaya (BUY, TP: RM6.48) for its strong earnings growth and WCT (BUY, TP: RM3.08), as we believe more contracts are in the pipeline. We also like Naim (BUY, TP: RM4.21) for thematic Sarawak play but downgrade Hock Seng Lee (NEUTRAL, TP: RM1.50), owing to the recent run-up in its share price.
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