CIMB Equities Research remains cautious on the construction sector despite possible revival of the East Coast Rail Line (ECRL), albeit downsized,
KUALA LUMPUR: CIMB Equities Research remains cautious on the construction sector despite a recovery in the sentiment after Gamuda’s share price surged.
It said on Thursday the surge was due to the recovery of sentiment on the overall construction sector, which appears to be triggered by recent news on the re-tendering of Klang Valley Double Tracking (KVDT) phase 2 and possible revival of the East Coast Rail Line (ECRL), albeit downsized. The ECRL remains suspended and under negotiations.
“Also, (Gamuda) management’s new alternative strategy of pursuing overseas contracts and the final approvals for the Penang Transport Masterplan (PTMP) in 1Q19 may signal to investors that the worst could be over for Gamuda’s share price,” it said.
However, CIMB Research is taking a more cautious stance on the sector’s outlook in 1H19.
News on the re-tendering of KVDT 2 is not new, as it was mentioned in Budget 2019. Though this can be viewed positively in terms of a clearer visibility of contract flows in 1H19, it remains to be seen whether the outcome of project structure, value of packages and tender details would be lucrative.
“We gather from our channel checks that the KVDT 2 tenders could be fairly competitive, in view of the cost revision and excess capacity of rail contractors which would be keen to put in a bid following the cancellation of other rail jobs,” it said.
Post Malaysia’s general elections (GE) in May 2018, Gamuda’s share price hit a five-year low of RM2.02 on Oct 10.
Though it ended the year higher at RM2.29, that was still a massive 53% below its end-2017 level, making it one of the worst performing contractors in 2018.
“Despite the stock’s sentiment-driven re-rating today, overall sector job replenishment outlook remains subdued in 2H19F, in our view, given the shortage of new large-scale government contracts which typically appeal to big contractors like Gamuda.
“Our FY7/19-21F EPS are unchanged. We keep our Reduce stance as we believe its current share price has run ahead of the actual outcome of KVDT 2 and ECRL.
“However, our TP rises from RM2.12 to RM2.45 as we narrow our RNAV discount from 40% to 30% to reflect investors’ less bearish sentiment on rail contractors’ chances in replenishing
their order books in 1H19.
“Upside risks to our call: 1) success in KVDT 2 tenders with a sizeable job win; and 2) revival of exposure to ECRL, post-contract downsizing outcome, by mid-2019. Unsuccessful bids for KVDT 2 and ECRL are potential de-rating catalysts,” said CIMB Research.
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