AmInvestment Bank Research, which upgraded its weighting on the construction sector to "neutral" from "underweight", raised its benchmark forward price-earnings for large- and mid-cap contracted to 14x from 12x, and for small-cap contractors to 9x from 8x.
Gamuda's PE was raised to 13x from 11x to reflect its riskier order book with self-funded reclamation works for Island A of the Penang Transport Master Plan.
"As a result, we raise the fair values of construction stocks under our coverage by 6–17%.
"We upgrade Sunway Construction to 'hold' from 'underweight' while maintaining 'hold' for Gamuda, Hock Seng Lee and Kimlun Corp and 'underweight' for IJM Corp and Econpile," said AmInvestment.
It added that it has no top pick for the sector but recommends Gamuda at a fair value of RM3.49 and Sunway Construction at RM1.80.
However, the research house held some reservations over the MRT3 announcement, which includes the current political uncertainties in the market.
"The local political landscape remains dynamic, with a strong likelihood of the 15th general election being called immediately after the lifting of the nationwide state of emergency on 1 Aug 2021," it said in its sector update.
Given the government's fiscal constraints, the main contractor may also be required to take on certain operating/commercial risk and participate in the funding of the project such as in the East Coast Rail Link and Island A of the Penang Transport Master Plan.
Furthermore, the construction period may be prolonged to lighten the stress on the government’s cash flow, which means the earnings impact of the MRT3 project on construction companies may not be as significant as compared with the MRT1 and MRT2.
"The minister’s statement on the MRT3 project aside, the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact
of the pandemic," said AmInvestment.