CIMB Research overweight on construction sector

Contract awards are expected to remain strong in 2H16 with the expected roll out of the RM5.3bil SUKE and RM4.2bil DASH highways, and the RM9bil Light Rail Transit Line 3 (LRT3) projects.

KUALA LUMPUR: CIMB Equities Research is overweight on the construction sector as the Pan Borneo highway picks up pace while contracts have been awarded for the Mass Rapid Transit 2 (MRT) project in the Klang Valley.
It said on Wednesday it expects an overall recovery of sector drivers in the second half of 2016. Other key sector catalysts in the months ahead are 1) recovery in the award phase for MRT 2’s southern portal, 2) announcement of Budget 2017 in October, and 3) recovery in private sector-driven jobs. 

Separately, a dark horse could be stronger follow-up momentum on the execution of the KL-Singapore high speed rail (HSR) project.

StarBiz reported that eight major works packages worth up to RM10bil (US$2.5bil) for Pan Borneo Sarawak were finalised and would be awarded by this month. Among the Sarawak firms that had participated in the tenders are Cahya Mata Sarawak, Shin Yang Shipping and Naim Cendera. 

CIMB Research said some of the prominent bidders are JV companies where partners comprise of one Peninsular Malaysia-based firm and an East Malaysia player.

“Based on our checks, the RM16bil (US$3.9bil) estimated cost is unchanged. YTD, two packages worth a combined RM3.2bil (US$780mil were awarded to Zecon-Kimlun JV (RM1.5bil) and HSL-Daya Maju JV (RM1.7bil). Indications are that at least four to five packages will be awarded over the coming weeks, with the balance in the later part of 2016. The RM16bil total construction covers a total alignment of 1,090km,” it said.

Works Minister Datuk Seri Fadillah Yusof recently said more than 60% of the construction costs would be borne by the issuance of new sukuk by DanaInfra Nasional while a further RM5bil (US$1.2bil) would come from the state’s development expenditure.

 According to the minister, this is the first time that DanaInfra has undertaken project financing beyond the MRT 1 and MRT 2 projects. The issuance of the bonds is timed for August and September.

“The roll-out of the Pan Borneo phase two awards is good news for both Sarawak and Klang Valley-based players given the predetermined JV structure for the tender phase. 

“Most contractors under our coverage are among the contenders but we believe the key ones to watch out for are Gamuda, IJM Corp, Sunway (via Sunway Construction) and WCT. They are among the larger Klang Valley-based JV partners that are key contenders; at least RM1bil from each package if awarded.
“Downside risks to Pan Borneo’s story are delays but we believe this is mitigated by the positive award momentum YTD. We believe Gamuda, our big-cap top pick, is among the frontrunners for this awards phase and a win could boost its all-time high order book of RM8.2bil (US$2bil) by 14%. 

“We think WCT also stands a good chance given its track record in road works, with a potential 20% boost to its current unbilled order book of RM4.4bil (US$1.1bil),” CIMB Research said.

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