Construction (Overweight ) HLIB Research PP 9484/12/2012 (031413) INDUSTRY INSIGHT 6 April 2016 Contract awards for 1Q16 Highlights Hitting the roof. Domestic contract awards to listed contractors in 1Q16 came in at a robust RM29.7bn, increasing by 6-folds YoY and 3-folds QoQ. This is the strongest quarter ever recorded, which is more than double that of the previous quarterly high in 2Q12 (RM13.2bn). Already a record year. Based on 1Q data alone, 2016 is already a record year for job flows. To put things into perspective, 1Q contract awards has already surpassed the previous full year high of RM28bn in 2012. MRT2 leads the way Of the RM29.7bn worth of job flows in 1Q, RM15.5bn (52%) came from the MRT2 underground works awarded to the MMC-Gamuda JV. Note that 1Q job flow numbers do not capture the MRT elevated packages awarded to AZRB (RM1.4bn) and SunCon (RM1.2bn) as the official Letter of Award was only issued earlier this month. while Pan Borneo kicks off. The Pan Borneo Highway (PBH) saw 2 packages awarded to the Zecon-Kimlun JV (RM1.5bn) and Hock Seng Lee-DMIA JV (RM1.7bn). Other notable contracts. These include (i) Setiawangsa- Pantai Expressway (RM3.7bn) to Ekovest, (ii) affordable housing in Kuching (RM761m) to Zecon, (iii) Kuching Wastewater System (RM750m) to Hock Seng Lee and (iv) UiTM teaching hospital in Puncak Alam (RM599m) to TRIplc. Looking ahead. Job flows in 2Q16 are likely to see a QoQ decline given the high base in 1Q but should continue to register growth YoY. Major jobs expected this year include remaining 8 elevated packages (RM8bn) of the MRT2, remaining 8 packages (RM8-10bn) of the PBH, LRT3 (RM9bn), SUKE (RM4bn) and DASH (RM4bn). All in all, we reckon there is a good chance that job wins for 2016 could amount to a staggering RM50bn. Less focus oversea s. Foreign contracts for 1Q16 stood at an insignificant RM295m, down -85% YoY and -49% QoQ. This is unsurprising as most contractors are focusing domestically given the abundance of job prospects. Jeremy Goh, CFA pwgoh@hlib.hongleong.com.my (603) 2168 1138 KLCON Index (291.2 pts) 320.0 310.0 300.0 290.0 280.0 270.0 260.0 250.0 240.0 KLCON (LHS) KLCI (RHS) 1850 1800 1750 1700 1650 1600 230.0 1550 Apr-15 Jun-15 Aug-15 Nov-15 Jan-16 Mar-16 Stock Rating Price Target Gamuda BUY 4.88 5.65 IJM BUY 3.60 3.82 WCT BUY 1.72 2.15 MRCB HOLD 1.21 1.32 Edgenta BUY 3.65 4.32 SunCon BUY 1.63 1.94 Mudajaya HOLD 1.37 1.14 Eversendai BUY 0.71 0.84 Kimlun BUY 1.80 2.23 HSL BUY 2.04 2.53 Mitrajaya BUY 1.22 1.98 SCable BUY 1.63 2.49 Domestic contracts (RM/bn) 35 30 25 20 15 10 5 0 10.0 15.6 11.9 28.0 2009 2010 2011 2012 2013 2014 2015 1Q16 15.4 17.9 21.9 29.7 Pts Risks Rating Top Picks A space to watch out for is the softening domestic property market, leading to slower private sector contracts. Maintain OVERWEIGHT Our investment thesis is simple: Stay OVERW EIGHT on construction as 2016 will undoubtedly be a record year for contract flows. We highlight IJM (BUY, TP: RM3.82) and Gamuda (BUY, TP: RM5.65) as our large cap sector picks. The potential inclusion of both stocks to the FBMKLCI in June is an added catalyst over the short term. Within the small-mid cap space, we like WCT (BUY, TP: RM2.15) given its expected earnings rebound backed by strong job wins and Mitrajaya (BUY, TP: RM1.98) for its strong earnings growth at undemanding valuations. Page 1 of 5 06 April 2016
Figure #1 Comparison of contract awards across periods Contract 1Q16 1Q15 4Q15 % YoY % QoQ Comments Domestic 29,698 4,150 7,419 616% 300% 1Q16 significantly YoY and QoQ due to (i) award of MRT2 underground works, contributing 52% and (ii) increase in absolute number of contracts at 48 (1Q15: 24, 4Q15: 35). Foreign 295 1,985 577-85% -49% 1Q16 YoY and QoQ as contractors focusing domestically. 1Q15 also had a high base due to the Lusail contract in Qatar (RM1.2bn). Total 29,993 6,135 7,995 389% 275% Driven by strong domestic contract flows, total job wins for 1Q16 are both YoY and QoQ. Figure #2 Quarterly trend of domestic contract awards (RM bn) 35 30 29.7 25 20 15 10 5-5.6 4.7 5.2 5.9 1.6 2.72.53.2 1.9 3.4 2.7 1.6 2.2 13.2 5.6 3.2 4.4 4.3 4.8 4.1 1.9 1.6 2.5 9.7 4.1 4.65.77.4 1Q16 4Q15 3Q15 2Q15 1Q15 4Q14 3Q14 2Q14 1Q14 4Q13 3Q13 2Q13 1Q13 4Q12 3Q12 2Q12 1Q12 4Q11 3Q11 2Q11 1Q11 4Q10 3Q10 2Q10 1Q10 4Q09 3Q09 2Q09 1Q09 Page 2 of 5 06 April 2016
Figure #3 Contracts awarded in 1Q16 Date Contract (RM/m) Awarded To Awarded By 31-Mar Underground works for SSP Line (MRT2) 15,470 MMC-Gamuda JV MRT Corp 31-Mar Redevelopment of police quarters, Gombak 134 WCT Holdings MRT Corp 31-Mar Pilling and basement for hotel in Penang 52 Econpile Holdings Eco Meridian 31-Mar Maintenance of systems for Klang Valley Double Track upgrade 318 Pestech International Dhaya Maju Infrastructure 29-Mar Segmental box girders (SBG) for MRT2 200 Kimlun Corporation MRT Corp 28-Mar 49-storey service appartment (364 units), Persiaran Stonor, KL 174 Ikhmas Jaya Gallimont Development 28-Mar MRT paid link between Pasar Seni LRT and KL KTM 104 TRC Synergy MRT Corp 28-Mar Renovation and conservation for Bangunan Sultan Abdul Samad 74 TRC Synergy MRT Corp 23-Mar Civil works and underground piping (Package 2) at RAPID 58 Ho Hup-KNM JV Sinopec 22-Mar 1 block of 128 unit apartment, Sepang 20 Sentoria Group Grinterra 22-Mar 800 units of terrace, semi-d and shop lots, Jln Kuantan-Pekan. 90 Sentoria Group H.A. Properties 21-Mar Airfield pavement rehabilitation, Brunei International Airport (Phase 1) 231 TRC-Swee JV Brunei Govt 21-Mar Uni Sultan Zainal Abidin Teaching Hospital, Terengganu 314 Pesona Metro Terengganu Incorporated 21-Mar Dredging works for Seri Tg Pinang 2, Penang 181 Kerjaya Prospek CCCC 18-Mar Pan Borneo H'way, Batingor to Julau and Sibu Airport to Sg Kua 1,710 HSL-DMIA JV Lebuhraya Borneo Utara 17-Mar Aircond & ventilation, Northpoint Shopping Centre, Yinshun, S'pore 31 Bintai Kinden W Ray Construction 17-Mar Kuching City Central Wastewater Management System (Package 2) 750 HSL-Nishimatsu JV State Govt of Sarawak 15-Mar Air Traffic Control Centre at KLIA 88 TRC Synergy Advanced Air Traffic Sys 11-Mar Pan Borneo H'way, Serian Roundabout - Pantu Junction 1,461 Zecon-Kimlun JV Lebuhraya Borneo Utara 9-Mar 4 Storey temporary sales office & show unit, BBCC 38 Zelan BBCC Development 8-Mar Earthworks and temporary facilities for sugar plant, Johor Bahru 9 Encorp MSM M'sia Holdings 7-Mar Common infra works (Package WPC1B & 1C) at Kwasa D'sara 269 TSR Capital Kwasa Land 1-Mar Cargo handling facility at existing LCCT, KLIA 12 Fajarbaru Builder Malaysia Airports Holdings 1-Mar Bored piling works for EKVE (Package 1 & 2) 77 Econpile Holdings Ahmad Zaki Resources 29-Mar Samalaju-2 275/132/33/kv Substation Establishment Project 281 L&T-HSL JV Sarawak Energy 25-Feb UiTM teaching hospital (PFI), Puncak Alam 599 TRIplc Govt of M'sia 25-Feb Condo (325 units) and villas (7 units), Petaling Jaya 181 Pesona Metro Asiana Agresif 25-Feb Office building (11 storey), Kota Kinabalu 137 Muhibbah Engineering PETRONAS 25-Feb Mixed development complex, PJ Midtown 293 Mitrajaya Holdings PJ Midtown Development 23-Feb 800 units of public appartments under PP1AM housing 157 Mitrajaya Holdings Putrajaya Holdings 15-Feb 2 blocks of condos at Putrajaya 240 TSR Capital Putrajaya Holdings 5-Feb 2,117 units of double-story terrace houses, Kuching, Sarawak 761 Zecon PPA1M 5-Feb Sewerage treatment plant, Johor Bahru 44 Progressive Impact Danga Bay 3-Feb Subcontract for bridge at Jln Ayer Keroh to Bdr Melaka 65 Ikhmas Jaya Kayangan Kemas 2-Feb Plumbing works for hotel along Jln Sultan Ismail, KL 19 AWC Ahmad Zaki 28-Jan Piling and sub-structure for Central Tower Project in i-city 68 Pintaras Jaya I-Berhad 26-Jan 24 storeys of affordable homes, Sg Besi 230 Instacom Group Coneff Corporation 22-Jan ACMV system, Tower Development, Saigon, Vietnam 32 Bintai Kinden Hoa Binh Construction 22-Jan 648 units of service apartment under PR1MA Homes, Melacca 107 Mercury Industries Upaya Jernih 21-Jan Police living quarters, Ampang Jaya 15 Seacera Group Turnpike Synergy 20-Jan Pantai Hospital, Ayer Keroh 27 Pesona Metro Pantai Medical Centre 20-Jan 2 blocks of service appartments, Sg Besi 240 Instacom Group Coneff Corporation 20-Jan Student campus for Kolej Teknologi Islam Melaka 120 Bintai Kinden Kolej Teknologi Islam Melaka 19-Jan Electrical works for warehouses at PTP 9 Bintai Kinden Kajima (Malaysia) 15-Jan Almas development, Puteri Harbour, Johor 484 IJM Corporation UEM Sunrise 13-Jan Piling for mixed development at Bdr Bestari, Klang 28 Pintaras Jaya Khoo Soon Lee Realty 11-Jan Setiawangsa-Pantai Expressway (BOT) 3,738 Ekovest Govt of Malaysia 11-Jan Plumbing works for KL118 62 AWC Samsung-UEM JV 6-Jan Leakage control for NRW reduction, Bkt Kecil, Terengganu 5 Salcon Syarikat Air Terengganu 4-Jan 2 blocks of service appartments, KL 166 Ikhmas Jaya Messrs Star Effort 2-Jan Pilling and substructures for mixed development, Kg Baru, KL 20 Econpile Holdings Ahmad Zaki Contract awards for 1Q16 29,993 Domestic contracts 29,698 Foreign contracts 295 Page 3 of 5 06 April 2016
Figure #4 Stock Peer comparison Mkt Cap (RM m) Price Target Rating FYE P/E P/B CY16 CY17 T1 T2 ROE (T1) Gamuda 11,751 4.88 5.65 BUY July 18.8 16.1 1.8 1.7 8.8% 1.9% IJM 12,908 3.60 3.82 BUY Mar 21.2 17.9 1.5 1.4 5.8% 1.6% WCT 2,146 1.72 2.15 BUY Dec 17.3 13.7 0.8 0.8 4.6% 2.3% MRCB 2,162 1.21 1.32 HOLD Dec 24.8 19.4 1.0 1.0 4.0% 1.0% Edgenta 2,969 3.65 4.32 BUY Dec 13.4 12.1 2.2 2.1 16.6% 4.5% SunCon 2,107 1.63 1.94 BUY Dec 16.0 14.4 4.4 3.7 26.1% 2.2% Mudajaya 738 1.37 1.14 HOLD Dec 15.5 9.6 0.6 0.6 4.2% 1.3% Eversendai 549 0.71 0.84 BUY Dec 8.5 6.5 0.6 0.5 6.5% 2.4% Kimlun 541 1.80 2.23 BUY Dec 8.9 8.9 1.1 1.0 12.7% 2.2% Hock Seng Lee 1,121 2.04 2.53 BUY Dec 12.9 11.4 1.5 1.4 12.5% 1.5% Mitrajaya 783 1.22 1.98 BUY Dec 7.8 7.2 1.5 1.3 19.9% 4.6% SCable 517 1.63 2.49 BUY Dec 9.5 8.0 1.4 1.3 15.9% 3.2% HLIB estimates Note: T1 refers to most immediate forecast year, T2 refers to the year after T1 Yield (T1) Page 4 of 5 06 April 2016
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As of 06 April 2016, the analysts, Jeremy Goh, who prepared this report, have interest in the following securities covered in this report: (a) -. Published & Printed by Hong Leong Investment Bank Berhad (10209-W) Level 23, Menara HLA No. 3, Jalan Kia Peng 50450 Kuala Lumpur Tel 603 2168 1168 / 603 2710 1168 Fax 603 2161 3880 Equity rating definitions BUY Positiv e recommendation of stock under coverage. Expected absolute return of more than +10% ov er 12-months, with low risk of sustained downside. TRADING BUY Positiv e recommendation of stock not under coverage. Expected absolute return of more than +10% ov er 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return betw een -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negativ e recommendation of stock not under coverage. Expected absolute return of less than -10% ov er 6-months. Situational or arbitrage trading opportunity. SELL Negativ e recommendation of stock under coverage. High risk of negative absolute return of more than -10% ov er 12-months. NOT RATED No research coverage and report is intended purely for informational purposes. Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% ov er 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return betw een 5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% ov er 12-months. Page 5 of 5 06 April 2016