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 earnings delivery risks due to delays in work progress/high building material cost, and (iii) toppish valuation with KLCON trading above its 5-year +.0SD. Furthermore, we no longer have any OUTPERFORM calls for our core coverage as most are MARKET PERFORM with three UNDERPERFORMs (SENDAI, HSL, and WCT). Going forward, we advocate a sell-on-strength strategy on the sector in which we urge investors to take the opportunity in taking profit on any positive news flow that is expected in HCY17. Strong interest in small-mid caps At our report cut-off date of 3-June-017, the average capital gains for the stocks under our coverage was 0.4% as compared to our 1QCY17 period that only saw an average capital gain of 6.8%, with the small-mid caps taking lead registering average gains of 7.7% over big-caps average gains of 9.4% on a QoQ basis. In our QCY17 performance review over 1QCY17, SENDAI garnered the strongest performance with positive gains of 16.4% followed by KERJAYA and SUNCON, which registered positive gains of 3.% and 18.8%, respectively, while the rest registering gains of <10% and the only stock that registered negative gains was HSL, losing 4.1%. We believe that SENDAI s stellar share price performance could be due to several reasons such as; (i) recovery in earnings, and (ii) strong interest from private investors like Mr. Koon Yew Yin who increased his shareholdings from 3.34% back in 016 to 8.1% as of our report cut-off date of 3-June-017. The other coverages strong performances were primarily due to their steady earnings delivery, which have yet to fail market expectations. In terms of year-to-date performance, KL Construction Index s (KLCON) gain of 18.7% still outperforms KLCI s gain of 8.4%. 1QCY17 results review. We started off 1QCY17 reporting season with better set of results released. Within our coverage universe, 11 construction stocks and 8 contractors came within to broadly within expectations, 1 above and below. This is an improvement compared to 4Q16 when 5 stocks failed to meet our expectations. Notably the disappointments this round are Sarawak-based contractors like HSL and NAIM. For HSL, disappointment mainly stems from slower-than-expected billings from on-going projects, i.e. Pan Borneo and Kuching Waste Water, while NAIM s disappointment is due to unexpected losses from Dayang. YoY, bulk of the contractors registered CNP growth ranging from %-% except for four contractors that saw declines in their CNP by 30-39%. The decline in the performance for these contractors, i.e. HSL, KIMLUN, MUHIBAH, SENDAI were mainly due to slow progress billings as bulk of their on-going project were still in their preliminary stage. QoQ wise, we have five contractors that registered decline of 4-343% in their CNPs due to similar reasons mentioned above. We note that NAIM saw its CNL widened by 343% as its associate Dayang sunk into the red this time around registering losses of RM13.0 vis-à-vis 4Q16 profit of RM14.0m; its continuous earnings disappointments have further reinforced our conviction in ceasing coverage on the stock. Slow award flows as expected As highlighted in our previous strategy report, we are anticipating slower contract flows at the range of RM5.0-30.0b for listed construction players in CY17 which came in within our expectations thus far given that we only saw RM13.9b worth of jobs clinched by listed players in 1HCY17, down by 6%, YoY. In terms of job flow expectations for HCY17, 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. As for mega projects like East Coast Rail Line, we are still maintaining our view of contract award flows 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 capabilities like SUNCON, ECONBHD, PTARAS, and IKHMAS should also be in the limelight as news flow picks up pace in HCY17 and we are also expecting more contract news flow related to road works maintenance in HCY17 given that the government has allocated RM4.6b for state road maintenance. Coupled with the possibility of a general election just round the corner, beneficiaries to look out for are names like PRTASCO, CMS, and EDGENTA. However, at this stage, we believe we have built-in sufficient order-book replenishments in our estimates. Delivery is the key! We strongly believe that given the slew of contracts won by contractors back in CY16 and HCY17, the main highlight for 017 would be earnings delivery, as 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. PP7004/0/013(03176) Page 1 of 10
Construction Sector Update Valuations. At our report cut-off on 3-June-017, KLCON index is trading at 16.4x which is at 5-year +.0SD level, and we deem valuations to be fairly rich with big caps trading at 1-year forward average of 1.3x (IJM, GAMUDA, WCT, SUNCON) coupled with the lackluster earnings trajectory despite multiple contract wins in the past. Meanwhile, small-mid caps 1-year forward valuations average at 13.5x had risen from 11.x as compared to 1QCY17 review period, charting a new high in valuation. 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. Maintain NEUTRAL. In view of potential slower contract flows throughout the year, higher execution risks, and coupled with valuations at -year high; we reiterate our NEUTRAL call on the sector. Furthermore, we no longer have any OUTPERFORM calls for our core coverage under the sector but three UNDERPERFORM calls, which are SENDAI, HSL, and WCT. Going forward, we advocate a sell-on-strength strategy on the sector in which we urge investors to take the opportunity in taking profit on any positive news flow that is expected in HCY17. APPENDIX Contractor Share Prices Quarterly ance Share Price Changes over 3QCY16 review Share Price Changes over 4QCY16 review Share Price Changes over 1QCY17 review Share Price Changes over QCY17 review Contractors period period period period IJM -3.7% -4.% 5.6% 0.3% GAMUDA 0.8% -.0% 4.% 9.0% WCT 10.0% 7.3% 5.1% 9.7% SUNCON.5% 3.7% 0.0% 18.8% Big cap average.4% 1.% 3.7% 9.4% HSL.9% -7.4% 4.9% -4.1% MUHIBAH 7.3% -5.9% 0.7% 1.1% MITRA 7.7% -10.7%.4% 7.0% SENDAI 1.1% 1.3% 6.1% 16.4% KIMLUN 10.5% 7.0% 1.4% 3.7% KERJAYA 16.5% -10.7% 17.8% 3.% Small-mid cap average 7.7% -1.1% 8.9% 7.7% Overall Average 5.6% -0.% 6.8% 0.4% Outstanding Orderbook Construction Company Outstanding Orderbook (RM'm) Earnings Visibility Eversendai Corporation Bhd 3,00 1.5- years Gamuda Bhd 8,00 3 years IJM Corporation Bhd 8,600 3-4 years Kimlun Corporation Bhd 1590 (Construction); 330 (Manufacturing) years Muhibbah Engineering (M) Bhd,100 years Mitrajaya Holdings Bhd 1,730 1.5 years WCT Holdings Bhd 5,00.5-3 years Hock Seng Lee Bhd,400 3-4 years Sunway Construction Bhd 4,600-3 years Kerjaya Prospek Group Bhd,600.5 years Chart 1: KL Construction s 5-year Fwd-PER Chart : KL Construction Relative ance PP7004/0/013(03176) Page of 10
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
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
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
Construction Sector Update Valuation & Justification For Calls NAME Price (3/6/17) Mkt Cap Old Target Price Valuation Basis (Old) New Target Price Valuation Basis Change? Rating (Old) Rating (New) (RM) (RMm) (RM) (RM) EVERSENDAI 1.37 1060 0.80 FY18 PER of 9.0x, in line with its target PER of mid-small cap peers of 9-13x 0.80 No Change Underperform Underperform GAMUDA 5.45 13310 5.45 SOP (Construction PER of 18). Our TP implies FY18 PER of 0.7x. 5.45 No Change IJM CORP 3.41 1365 3.51 SOP (Construction PER of 16x). 3.51 No Change KIMLUN CORP.5 698.7 MUHIBBAH.71 130.94 HOCK SENG LEE 1.63 896 1.50 WCT HOLDINGS.04 86 1.83 MITRAJAYA 1.37 91 1.49 SUNCON.0 610.00 KERJAYA 3.4 1674 3.10 FY18E PER of 9x, inline with small-mid-cap size peers' target PER range of 9-13x 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 FY18 PER of 11x, in line with its small-mid-cap peers' PER of 9-13x SOP (Construction Fwd-PER of 13x). Our TP implies 15.6x FY18 PER. SOP (Construction Fwd-PER of 1x). Our TP implies 11.4x FY18 FD PER, which is inline with small-mid-cap peers range of 9-13x SOP (Construction Fwd-PER of 16x). Our TP implies 17.5x FY18 PER. SOP (Construction Fwd-PER of 13x). Our TP implies 11.8x FY18 PER, which is inline with small-mid-cap peers range of 9-13x.7 No Change.94 No Change 1.50 No Change Underperform Underperform 1.83 No Change Underperform Underperform 1.49 No Change.00 No Change 3.10 No Change PP7004/0/013(03176) Page 6 of 10
Construction Sector Update YTD ance of Core Coverage Source: Company, Kenanga Research PP7004/0/013(03176) Page 7 of 10
Construction Sector Update YTD ance of Non-Core Coverage Source: Company, Kenanga Research PP7004/0/013(03176) Page 8 of 10
Construction Sector Update Peer Comparison CORE COVERAGE NAME Price (3/6/17) 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 1.37 1060-7.6 18.0 15.8 1% 6% 1.1-140.3 58.9 67.1-14% 14% 0.80 Underperform 138.3 GAMUDA BHD 5.45 13310 30.8 1.7 0.7 % 10% 1.8 499.3 709.5 741.7 4% 5% 5.45 14.0 IJM CORP BHD 3.41 1365 4.7.5 0. % 6% 1.3 499.9 549.5 61 10% 11% 3.51 6.6 KIMLUN CORP BHD.5 698 8.5 9.9 8.9 3% 1% 1. 8. 70.7 78.3-14% 11%.7 8. MUHIBBAH ENGINEERING (M) BHD.71 130 16.0 13.8 13. 1% 11% 1.4 87.7 101.5 106. 16% 5%.94 1.5 HOCK SENG LEE BERHAD 1.63 896 15.9 14.6 1.1 1% 8% 1. 56.4 61.4 74.3 9% 1% 1.50 Underperform 1.9 WCT HOLDINGS BHD.04 86 40.3 3.3 0.7 % 5% 1. 84.8 146.9 165.3 73% 13% 1.83 Underperform 18.6 MITRAJAYA HOLDINGS BHD 1.37 91 10.6 10.1 10.5 4% 15% 1.5 97.3 10.1 98.6 5% -3% 1.49 8.7 SUNWAY CONSTRUCTION GROUP BH.0 610. 18.0 17.8 % 5% 4.5 117.7 145. 146.9 3% 1%.00 18.8 KERJAYA PROSPEK GROUP BHD 3.4 1674 18.3 14.5 1.5 % 15%.3 100 15.9 146.3 6% 16% 3.10 49.3 Average 18.0 16.6 15. 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 1.37 738 -.8 19. 14.0 n.a. n.a. n.a. -64.9 38.5 5.9-115% 37% n.a. Not Rated 50.5 PROTASCO 1.06 450 10.1 7.5 7.4 6% 14% 1.1 44.4 59.8 60.1 35% 1% 1.36 Trading Buy -6. PINTARAS JAYA 4.01 661 36.7 15.5 1.9 5% 13%.0 17.8 4. 50.6 137% 0% 4. Trading Buy 13.9 GABUNGAN AQRS 1.4 554 4.5 18.6 9.4 1% 1% 0.3.6 9.8 58.9 3% 98% 1.51 Trading Buy 56.9 GADANG HOLDINGS 1.9 846 7.9 8.6 8. 3% 18% 1.5 94. 86.8 90.8-8% 5%.44 Not Rated.9 AZRB 1.10 585 0.5 18.3 n.a. % n.a. n.a. 6 9 n.a. 1% n.a. 1.35 Trading Buy 73. TRC SYNERGY 0.71 341 11.4 10.4 13.0 1% 8% 0.8 9.9 3.9 6.3 10% -0% n.a. Not Rated 86.8 BINA PURI 0.41 108 96.6 6.5 6.5 n.a. n.a. n.a. 1 14.9 14.9 1390% 0% n.a. Not Rated -6.9 GEORGE KENT 4.19 1573 15.5 16.8 14.8 % 1% 3.5 101.4 93.8 106-7% 13%.8 Trading Buy 37.8 PESONA 0.64 47 1.0 11.9 8.6 4% %.7 0 35.3 48.5 77% 37% 0.485 Take Profit 5.8 JAKS 1.49 718 0.9 10.5 7.6 0% 13% 1.4 736 61.933 85.433-9% 38% 1.54 Not Rated 46.1 Average.0 13.1 10.3 PP7004/0/013(03176) Page 9 of 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, 50400 Kuala Lumpur, Malaysia Telephone: (603) 17 0880 Website: www.kenanga.com.my Email: research@kenanga.com.my Chan Ken Yew Head of Research PP7004/0/013(03176) Page 10 of 10