All About Valuations. Sector Update

Size: px

Start display at page:

Download "All About Valuations. Sector Update"

Andrew Edwards
5 years ago
Views:

1 Sector Update Construction All About Valuations By Adrian Ng l adrian.ng@kenanga.com.my NEUTRAL We reiterate our NEUTRAL call on the sector due to: (i) slow contract award news flow for 017, (ii) heightened earnings delivery risks due to delays in work progress as well as high building material cost, and (iii) toppish valuation with the KLCON trading at 5-year +1.5SD. Furthermore, we no longer have any OUTPERFORM calls in our core coverage for the sector. Looking ahead, we advocate a sell-on-strength strategy on the sector in which we advise investors to take the opportunity to take profit on any positive news flow that is expected in 4QCY17. Reversal in progress At our report cut-off date of 1-Sep-017, we saw the average capital gains for the stocks under our coverage down by 5.7% compared to QCY17, which registered average capital gains of 0.4%, with the small-mid caps, registering average negative returns of 8.6% over big-caps average negative returns of 1.3% on a QoQ basis. In our 3QCY17 performance review over QCY17, only three contractors under our coverage registered positive gains with KERJAYA garnering the strongest performance with positive gains of 13.3% followed by SUNCON and MUHIBAH, which registered positive gains of 11.4% and 5.%, respectively, while the rest registered negative returns ranging between 0.9%-35.8%. We believe that reversal in share price trend for bulk of the contractors were largely due to steep valuations as KLCON index was trading at the peak of 16.4x back in QCY17, and we believe that stocks that have performed fairly well in 3QCY17 should see some corrections ahead. In terms of year-todate performance, KL Construction Index (KLCON) s gain of 15.6% still outperformed KLCI s gain of 6.8%. QCY17 results review. Out of 10 construction stocks under our coverage, only two contractors disappointed in earnings, while the remaining eight construction players earnings performance came in within/broadly within our expectations. The two contractors that disappointed were HSL and MITRA, which saw unexpected costs overrun due to delays in construction progress. The number of stocks that disappointed in QCY17 is the same as 1QCY17. YoY, bulk of the contractors registered CNP growth ranging from 5%-33% except for four contractors that saw declines in their CNP by the range of 0%-3%. The decline in the performance for these four contractors, i.e. HSL, KIMLUN, MITRA, SENDAI are mainly due to slow progress billings and cost overruns due to delays in certain projects. QoQ-wise, four contractors registered decline of 1%-30% in their CNP due to similar reasons mentioned above. In terms of earnings revision, we lowered our earnings estimates for three stocks, i.e. IJM, MITRA, HSL as we factored in a slower progressive billing cycle and higher operating cost for MITRA and HSL, while the minor tweak in IJM s earnings are mainly due to the reduction in IJMPLNT s earnings. Construction award flows down year-on-year as expected As highlighted in our previous strategy report, we are anticipating slower contract flows at the range of RM b for listed construction players in CY17 which came in within our expectations thus far given that we only saw RM0.5b worth of jobs clinched by listed players in 9MCY17, down by 41%, YoY. In terms of job flow expectations for 4QCY17, we are looking out for news flow from LRT3 (RM9.0b), Pan-Borneo Sabah (RM1.8b), and government housing jobs, while jobs from the private sector would be from projects like Bukit Bintang City Centre and new development launches with beneficiaries such as IJM, SUNCON, GAMUDA, AZRB, GADANG and KERJAYA. Earnings delivery is critical. We maintain our view that earnings delivery performance is crucial for contractors as they need to execute the slew of contracts clinched in CY16 and 1HCY17. Our major concern for contractors is their ability to deliver earnings in CY17, especially after they had enjoyed a good run backed by strong contract award flows, which have built in high expectations for the sector. Furthermore, we believe that contractors earnings risk is heightening due to the rising cost of building material and labour costs. Budget 018. Last year, the government announced c.rm81.0b worth of construction projects under Budget 017 of which the bulk of it is not executed nor awarded yet. Hence, we believe that the upcoming Budget 018 will still be focused on the Rakyat with less emphasise on construction industry. Nonetheless, we believe that the government will most likely reiterate previously announced projects with more details, i.e. award and execution timeline. Likewise, we continue to maintain our view that contract award flows for ECRL is only expected to materialise earliest by 4QCY17 or 1QCY18, and should the contract award be dished out earlier than expected it would be a re-rating catalyst for the sector and we believe that most contractors would benefit given the sheer size of the project. Names to look out for are GAMUDA, IJM, AZRB, GBGAQRS, and potentially GKENT. That said, contractors with strong piling track record like SUNCON, ECONBHD, PTARAS, and IKHMAS should also be in the limelight as news flow picks up in 4QCY17. PP7004/0/013(03176) Page 1 of 10

2 Construction Sector Update Valuations tapering but... At our report cut-off on 1-Sep-017, KLCON index is trading at 1-year forward PER of 15.7x which is at 5-year +1.5SD level even though it has come off from its peak at 16.4x, and we deem valuations to be fairly rich with big caps trading at 1-year forward average of 0.5x even though it has tapered from 1.3x (IJM, GAMUDA, WCT, SUNCON) in last our last quarter review, coupled with the lackluster earnings trajectory despite multiple contract wins in the past. Meanwhile, small-mid caps 1-year forward valuations fell slightly to an average of 13.3x from 13.5x as compared to the QCY17 review period when valuation remains rich in the mid-cap space. We believe that the re-rating is largely driven by improved market sentiment, and with valuations at seemingly toppish levels, risk of share price corrections is high if there are disappointments in earnings delivery or swing in market sentiment, especially in the mid-cap space. Maintain NEUTRAL. In view of the lack of strong catalyst throughout the year, higher execution risks, and coupled with valuations at -year high; we continue to reiterate our NEUTRAL recommendation on the sector. Furthermore, we no longer have any OUTPERFORM calls for our core coverage under the sector. Looking ahead, we advocate a sell-on-strength strategy on the sector in which we urge investors to take the opportunity to take profit on any positive news flow that is expected in 4QCY17. APPENDIX Contractor Share Prices Quarterly ance Share Price Changes over 4QCY16 review Share Price Changes over 1QCY17 review Share Price Changes over QCY17 review Share Price Changes over 3QCY17 review Contractors period period period period IJM -4.% 5.6% 0.3% -0.9% GAMUDA -.0% 4.% 9.0% -1.7% WCT 7.3% 5.1% 9.7% -14.% SUNCON 3.7% 0.0% 18.8% 11.4% Big cap average 1.% 3.7% 9.4% -1.3% HSL -7.4% 4.9% -4.1% -10.4% MUHIBAH -5.9% 0.7% 1.1% 5.% MITRA -10.7%.4% 7.0% -1.9% SENDAI 1.3% 6.1% 16.4% -35.8% KIMLUN 7.0% 1.4% 3.7% -.% KERJAYA -10.7% 17.8% 3.% 13.3% Small-mid cap average -1.1% 8.9% 7.7% -8.6% Overall Average -0.% 6.8% 0.4% -5.7% Outstanding Orderbook Construction Company Outstanding Orderbook (RM'm) Earnings Visibility Eversendai Corporation Bhd 3, years Gamuda Bhd 8,00 3 years IJM Corporation Bhd 9, years Kimlun Corporation Bhd 1590 (Construction); 330 (Manufacturing) years Muhibbah Engineering (M) Bhd,100 years Mitrajaya Holdings Bhd 1, years WCT Holdings Bhd 6, years Hock Seng Lee Bhd, years Sunway Construction Bhd 6,500-3 years Kerjaya Prospek Groud Bhd 3,150.5 years Chart 1: KL Construction s 5-year Fwd-PER Chart : KL Construction Relative ance PP7004/0/013(03176) Page of 10

3 Construction Sector Update CONTRACTORS FWD PBV Fwd PBV: GAMUDA Fwd PBV: HSL Fwd PBV: IJM Fwd PBV: KIMLUN Fwd PBV: MUHIBAH Fwd PBV: SUNCON Fwd PBV: WCT Fwd PBV: MITRA PP7004/0/013(03176) Page 3 of 10

4 Construction Sector Update Fwd PBV: SENDAI Fwd PBV: KERJAYA CONTRACTORS FWD PER Fwd PER: GAMUDA Fwd PER: HSL FwdCore PER: IJM FwdCore PER: KIMLUN Fwd PER: MUHIBAH Fwd Core PER: SUNCON PP7004/0/013(03176) Page 4 of 10

5 Construction Sector Update Fwd PER: WCT Fwd PER: MITRA Fwd PER: SENDAI Fwd PER: KERJAYA This section is intentionally left blank PP7004/0/013(03176) Page 5 of 10

6 Construction Sector Update Valuation & Justification For Calls NAME Price (1/9/17) Mkt Cap Old Target Price Valuation Basis (Old) New Target Price Valuation Basis Change? Rating (Old) Rating (New) (RM) (RMm) (RM) (RM) EVERSENDAI FY18 PER of 9.0x, in line with its target PER of mid-small cap peers of 9-13x 0.75 No Change Underperform Underperform GAMUDA SOP (Construction PER of 18). Our TP implies FY18 PER of 0.7x No Change IJM CORP SOP (Construction PER of 16x) No Change KIMLUN CORP FY18E PER of 9x, inline with small-mid-cap size peers' target PER range of 9-13x.7 No Change MUHIBBAH SOP (Construction PER of 1x). Our TP implies FY18 PER of 14.3x, slightly higher compared to small-mid-cap size peers' PER range of 9-13x.94 No Change HOCK SENG LEE FY17 PER of 11x, in line with its small-mid-cap peers' PER of 9-13x 1.40 No Change WCT HOLDINGS MITRAJAYA SUNCON KERJAYA SOP (Construction Fwd-PER of 13x). Our TP implies 13.9x FY18 PER. SOP (Construction Fwd-PER of 1x). Our TP implies 11.x FY18 FD PER, which is inline with small-mid-cap peers range of 9-13x SOP (Construction Fwd-PER of 16x). Our TP implies 17.1x FY18 PER. SOP (Construction Fwd-PER of 13x). Our TP implies 1.6x FY18 PER, which is inline with small-mid-cap peers range of 9-13x 1.83 No Change 1.0 No Change.9 Upgrade Underperform 3.30 No Change Underperform Underperform PP7004/0/013(03176) Page 6 of 10

7 Construction Sector Update YTD ance of Core Coverage Source: Company, Kenanga Research PP7004/0/013(03176) Page 7 of 10

8 Construction Sector Update YTD ance of Non-Core Coverage Source: Company, Kenanga Research PP7004/0/013(03176) Page 8 of 10

9 Construction Sector Update Peer Comparison CORE COVERAGE NAME Price (1/9/17) Mkt Cap PER (x) (RM) (RMm) Actual 1 Est. Div. Yld. Est. ROE P/BV Net Profit (RMm) 1 NP Growth (%) (%) (x) Actual 1 NP Growth Target Price (%) (%) (RM) Rating YTD (%) EVERSENDAI CORP BHD % 6% % 19% 0.75 Underperform 54.8 GAMUDA BHD % 10% % 19% IJM CORP BHD % 6% % 1% KIMLUN CORP BHD % 1% % 11% MUHIBBAH ENGINEERING (M) BHD % 11% % 5% HOCK SENG LEE BERHAD % 7% % 40% WCT HOLDINGS BHD % 5% % 14% MITRAJAYA HOLDINGS BHD % 10% % 14% SUNWAY CONSTRUCTION GROUP BH % 5% % 19% KERJAYA PROSPEK GROUP BHD % 16% % 17% 3.30 Underperform 75.1 Average NOT RATED/ON OUR RADAR NAME Price Mkt Cap PER (x) (RM) (RMm) Actual 1 Est. Div. Yld. Est. ROE P/BV Net Profit (RMm) 1 NP Growth (%) (%) (x) Actual 1 NP Growth Target Price (%) (%) (RM) Rating YTD (%) MUDAJAYA n.a. n.a. n.a % 37% n.a. Not Rated 5.3 PROTASCO % 14% % 3% 1.5 Trading Buy -5.3 PINTARAS JAYA % 1% % 0% 4. Trading Buy 14.5 GABUNGAN AQRS % 11% % 109% 1.6 Not Rated 89.0 GADANG HOLDINGS % 14% % 5%.44 Not Rated 18.1 AZRB n.a. 15% % 7% 1.35 Trading Buy 76.4 TRC SYNERGY % 8% % -0% n.a. Not Rated BINA PURI n.a. n.a. n.a % 0% n.a. Not Rated GEORGE KENT % 1% % 13%.8 Trading Buy 55.4 PESONA % % % 37% Take Profit JAKS % 1% % 38% 1.54 Not Rated 5.5 Average PP7004/0/013(03176) Page 9 of 10

10 Construction Sector Update Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock s Expected Total Return is LESS than -5% Sector Recommendations*** OVERWEIGHT : A particular sector s Expected Total Return is MORE than 10% NEUTRAL : A particular sector s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 1, Kenanga Tower, 37, Jalan Tun Razak, Kuala Lumpur, Malaysia Telephone: (603) Website: research@kenanga.com.my Chan Ken Yew Head of Research PP7004/0/013(03176) Page 10 of 10

Look Out for Delivery

Sector Update Construction Look Out for Delivery By Adrian Ng l adrian.ng@kenanga.com.my NEUTRAL We reiterate our NEUTRAL call on the sector due to: (i) slower contract award news flow for 017, (ii) heightened