East Coast railway spurs Overweight call on construction sector

KUALA LUMPUR: CIMB Equities Research has an Overweight call on the construction sector with Instacom, Gamuda and Muhibbah Engineering among its top picks.

It said on Thursday it was positively surprised by a StarBiz report about a privately funded new rail line on the East Coast.

StarBiz reported a new double-track rail line linking Mentakab to Kuantan was being planned and it would be entirely financed by the private sector. 

The report said this will be the first time the infrastructure is fully borne by a private sector entity with the government not having to bear any operational or financial risk. 

CIMB Research said the report stated the project has been approved by the top level officials in the government and is expected to be announced soon. The 100km to 120km rail project, with a price tag of RM5bil or cost RM40mil to RM60mil per km, was likely to start in 2017.  

The other job is the RM8bil Gemas-JB double tracking project (197km), which, will also be largely funded by Chinese major contractors. This project is at a more advanced stage.  Chinese funded, led by CRCC; could be awarded soon  

“Our separate checks have confirmed that the Mentakab-Kuantan rail line should be awarded over the next one to three months.  

“If CRCC secures this job, we believe Instacom should emerge as the best play. Among contractors under our coverage, Instacom is the clearest proxy for Chinese contractor-led projects domestically. 

“The possibility of other new rail jobs largely funded by CRCC could also be good news for the group given its track record in winning subcontract packages from CRCC building and infra projects in Malaysia. Instacom’s outstanding orderbook stood at RM1.9bil as at end-2015,” it said.

CIMB Research said new jobs emerging for 2016, including this new rail project, support its Overweight call on the construction sector. 

“We expect a strong year of order flow across the board, underpinned by good newsflow. Private sector-led projects, including those funded by Chinese entities, are among the key drivers, in our view. 

“Gamuda remains our top big cap pick for its exposure to MRT 2, Pan-Borneo Highway and Penang TMP, while Muhibbah is our preferred smaller cap pick for its exposure to downstream oil & gas infra,” it said.