Maintain overweight: The award of the Semantan intake and pumping station works is a positive indication that works are rolling in, albeit after a long wait of 13 months. We believe the award for other upstream packages will follow.
News flow in the sector should remain strong this week with the unveiling of the 10th Malaysia Plan. This will drive interest in construction stocks.
We continue to overweight the sector. Loh & Loh (buy; target price: RM6), at its RM4.42 close, is undemanding, trading at just 5.8 times 2011 PER (price-earnings ratio) after stripping of net cash.
The Loh & Loh-George Kent-Hazama joint venture (JV) has secured the second package of the inter-state raw water transfer project — Semantan intake and pumping station works. The contract value is RM317.6 million and work will take 46 months, to be completed by May 30, 2014. This is a long wait (13 months) in terms of project award — the first package for a 45km tunnel works was awarded to Shimizu-Nishimatsu-UEM Builders-IJM JV back in May 2009. The completion deadline for the first package of work is also May 2014.
The other upstream works yet to be awarded are the Kelau Dam and piping works, where the former is worth circa RM300 million. We think that the dam will be the next to be awarded as it needs three years of work and another year to fill up the dam before testing and commissioning can be done. In addition, the downstream package comprising the Langat 2 treatment plant worth RM5 billion may have a little luxury of time — to be awarded by latest mid- 2011, assuming three years of work, to be completed by May 2014.
Both Loh & Loh’s and George Kent’s announcements to Bursa Malaysia did not state their respective stakes in the JV. We think that Loh & Loh and Hazama would participate in the civil and structural (C&S) work, while George Kent said that it would feature in the mechanical and electrical (M&E) work. As M&E should be larger in size compared to the C&S portion, we think that Loh & Loh’s participation could be up to the 30% level and George Kent up to 50%, with the balance taken up by Hazama.
Assuming an 8% gross margin and a 30% stake in the JV, we estimate that this new win would add RM5.7 million net profit (8.4 sen earnings per share) to Loh & Loh. As for George Kent, assuming a similar gross margin and a 50% stake, the earnings contribution is RM9.5 million (4.2 sen EPS). We believe that meaningful contributions for both would only start in 2011, potentially peaking in 2012 for Loh & Loh and 2013 for George Kent.
We retain our forecasts for Loh & Loh pending a corporate update. Our forecasts have upside potential as we have not incorporated further job wins this year, apart from the recently secured Hulu Terengganu hydroelectric project worth RM828 million where Loh & Loh has a 60% stake.
Including the Semantan works, we estimate that job wins year to date have topped RM700 million, a record high. Even before including the Semantan works, we project a strong 14% two-year net profit compound annual growth rate for Loh & Loh. George Kent is not under our coverage. — Maybank IB Research, June 7This article appeared in The Edge Financial Daily, June 8, 2010.
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