Higher infra spending to benefit Gamuda, IJM and SunCon

Finance Minister Tengku Datuk Seri Tengku Zafrul Tengku Abdul Aziz at the briefing of the Bandar Malaysia project by deputy executive chairman of Iskandar Waterfront Holdings, Tan Sri Lim Kang Hoo recently. Bandar Malaysia is the largest single urban development project in Southeast Asia with a gross development value of RM140bil. - Bernama file photo

KUALA LUMPUR: Alliance DBS Research expects the government to increase infrastructure spending in the Budget 2021 proposals in November and this move will benefit Gamuda, IJM Corp and Sunway Construction.

In its construction sector report issued on Wednesday, it thinks the recent 2Q GDP contraction of 17% (worst decline since 4Q9 1998) would be a precursor to a more aggressive allocation for infrastructure spending in the coming Budget.

“With the record-low interest rates now, we expect global economies including Malaysia to whip out the 2008 play book and roll out high-multiplier infrastructure projects, ” it said.

Alliance DBS Research said it sees similarities to the 2008/09 experience as the country is at the tail end of the 11th Malaysian Plan (2015-2020). The 12MP will be tabled in January 2021. This is akin to 2009 that was the tail end of 9MP.

It pointed out there was higher tolerance for a wider budget deficit, as evidenced by the stimulus packages.

In 2009, the budget deficit widened to 7% and the debt-to-GDP ceiling was raised twice to 55%.

Now, the dominant component party in the current government (now known as Perikatan Nasional) has a reputation of rolling out contracts aggressively – thus implying the revival of Bandar Malaysia and subsequently MRT 3 and High Speed Rail (HSR).

In 2009, there was emphasis on Private Financing Initiatives (PFI) that will also be the case in 2020. Post Covid-19 normal.

“We envisage: i) higher adoption of industrialised building system (IBS) to lead to reduced labour reliance; ii) lower private sector building tenders and delays to factor in lifestyle changes; iii) contractors pricing in higher margins to build in higher cost of testing and risks due to social distancing; iv) reduced cross-border opportunities; and iv) enactment of a Covid-19 bill.

“Gamuda, IJM and Sunway Construction are top picks. Construction uptrend cycles have been long – the trough to peak for the past three cycles has been between 16 and 30 months. While a snap election may delay project awards, valuations are already at a 10-year trough or -2SD of its 10-year mean.

“Our top picks are Gamuda, IJM and Sunway Construction for their strong execution track record, balance sheet strength and reputation in large-scale public sector jobs.

Alliance DBS Research said Gamuda is its pick for an impending revival in the construction sector that we think will happen in late 3Q20.

“We expect the government to revive key infrastructure projects such as MRT 3 and HSR soon. The key events to watch out for are i) medium-term economic recovery plan in October; ii) Budget 2021 in November, and iii) the 12MP to be tabled in January 2021, ” it said.

Prior to GE 14, Gamuda was already awarded the PDP role for the HSR Northern section with MRCB while its experience and depreciated tunnel boring machines used in MRT 1 and 2 will make it a frontrunner for MRT 3.

“Besides this, we think Gamuda could surprise on the upside with potential contract wins in Australia. We reiterate our Buy rating with a TP of RM4.60. Its valuation is just at one time FY21F book value (BV) which is at -one standard deviation (SD) of its five-year mean.

As for IJM, the research house said the group’s contract wins are picking up traction – it has won the first portion of the Light City project.

This for the proposed construction and development of an 11-storey retail mall and convention centre in George Town, Penang for a contract sum of RM864.7mil.

The project is part of the development of the integrated waterfront mixed development project in Penang known as The Light City which will consist of a convention centre, retail malls, hotels, residential condominiums and offices.

The second portion, i.e. the hotels, residential condominiums and offices, is worth RM500m-500m bringing the total construction value of the project to c.RM1.4bil. This portion is expected to be awarded by year end.

“We are maintaining our BUY rating with an SOP-derived TP of RM2.20. Its valuation of 0.5 times FY21F BV looks extremely cheap and is even trading at below the recent March 2020 lows.

“Part of the recent underperformance is due to it being removed from the MSCI Global Standard Indexes.

“We expect the stock to be a key beneficiary of a revival in government spending expected to be announced at the upcoming Budget in November. With the sale of Scomi, this also removes a key overhang on the stock, ” it said.

As for Sunway Construction, its RM2bil new orders are still intact. While most contractors have struggled to replenish its orderbook over the past two years, Sunway Construction has met this with ease.

Alliance DBS Research said YTD wins are now at RM1.5bil and is well on track to hit its RM2bil target for FY20F. It has a current outstanding tender book of RM8.5bil, of which half comprises overseas jobs in India, Singapore and the Philippines.

“It is bullish on the upcoming Large Scale Solar 4 (LSS 4) project. Sunway Construction has learned from its past mistakes when bidding for LSS 3 and is already bidding for 4 EPCC tenders for LSS 4 where it is working with the project owners.

“We understand collectively these tenders which close in September 2020 and awards amounting to RM800mil could take place in January 2021. To be sure, it is also already doing small-scale renewable energy projects for its parent company.

“We maintain our BUY call on Sunway Construction with a TP of RM2.30. Sunway Construction remains a strong proxy to the anticipated revival in infrastructure spending given its experience and solid track record in rail-based projects such as MRT and LRT.

“Its internal pipeline of projects from its parent company also gives it a comfortable base of orders every year. We expect its balance sheet to remain solid and dividend payout ratios to be maintained, ” Alliance DBS Research said.

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