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PublicInvest Research Sector Update Thursday, June 22, 2017 KDN PP17686/03/2013(032117) Construction Overweight
FBM KL Construction INDEX Infrastructure Spending Still A Key Primer
(m) Volume (m) KLcon Index 350 400 Infrastructure spending to continue. With a record-high c.RM58bn worth of
300 350 infrastructure jobs already dished out in 2016, we believe infrastructure 300 250 spending is still not showing any signs of slowing down, with more high profile 250 200 jobs planned. Among the key infrastructure jobs that we expect to be awarded 200 150 in the near term include East Coast Rail Link (c.RM55bn), LRT3 (c.RM10bn), 150 100 Kuala Lumpur-Singapore High Speed Rail (c.RM70bn) and MRT3 (c.RM50bn). 100
50 50 Other infrastructure jobs include BRT lines (c.RM2.0bn), Gemas-JB Double
0 0 Tracking (c.RM9bn) and Pan Borneo Sabah (c.RM13bn). Jun-16 Aug-16 Sep-16 Nov-16 Dec-16 Feb-17 Mar-17 May-17 Jun-17
Construction as economic stimulus. We believe that construction will remain SECTOR PERFORMANCE a key contributor to the local economy. As a percentage of GDP, construction continues to trend higher, with c.4.9% of GDP in 2016 from c.3.0% of GDP in 1M 3M 6M 2006-2007. It appears higher than other emerging countries (averaging 3.6% of Absolute Returns -1.5 +5.1 +17.6 GDP between 1992 and 2013) but within the range of developed countries in Relative Returns -1.9 +3.9 +8.6 Asia and Oceania (4.6% of GDP). China’s construction spending is the highest at 8.6% of GDP. As such, we expect the current trajectory of construction spending to continue, supported especially by transportation-related jobs.
Maintain OVERWEIGHT stance. We expect construction stocks to continue to RECOMMENDATION TABLE be bolstered by the positive jobs flows, especially from the huge infrastructure projects planned. This year started with the remaining MRT2 contracts
Current Target Upside awarded, and the award of the RM1bn Bukit Bintang City Centre (BBCC) retail Call (RM) (RM) (%) mall to IJM Corporation (IJM). Prasarana also dished out two smallish LRT3 contracts to Mudajaya (RM58m) and WCT Holdings (RM186m). We expect Gamuda 5.40 6.20 +15 O other civil work packages for LRT3 to be rolled out soon as the tenders are IJM 3.46 3.40 -2 N WCT 2.04 2.00 -5 N already closed back in March. Revenue visibility remains good, with most Jaks 1.51 1.50 -1 N construction players under our coverage having outstanding order books that TRC 0.71 0.82 +15 O could last them c.2-5 years, with scope for jobs replenishment remaining HSL 1.63 1.86 +14 O healthy.
The FBM KL Construction Index is now trading at a rolling 1-year forward PE of c.16x, which above the mean of 15x. The index has moved up significantly from its 5-year low in 2012 where it tested -1SD (standard deviation) below
mean and within the peak reached in 2016. Selected construction players such as big cap players Gamuda and IJM could continue to be the prime beneficiaries, especially from infrastructure projects. Meanwhile, other small- mid cap players will enjoy the spillover by participating as sub-contractors for the mega projects. That said, earnings of Gamuda and IJM could be pressured by weakness from respective property segments, but news flows are expected to hog the limelight and sustain the premium valuations. The sector enjoyed
premium valuations as evident during the Ninth Malaysia Plan (9MP) and Tenth Malaysia Plan (10MP) periods. To recap, the construction sector traded as high as c.25x PE or above +2SD in 2007/08.
Tan Siang Hing T 603 2268 3016 F 603 2268 3014 E [email protected]
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Development Spending Under Eleventh Malaysia Plan (11MP)
Development spending at RM45bn in Under 11MP, the total development expenditure allocated is RM260bn, with c.RM45bn 2016, and projected another RM46bn in already spent in 2016. In 2017, the government’s gross development expenditure 2017 spending is projected to grow 2.2% YoY to RM46bn. With the allocation under 11MP still unchanged, the average spending for 2017 to 2020 is c.RM53.8bn. Hence, we still believe that that the jobs flows will continue to be robust, underpinned by major jobs such as MRT, LRT, Pan Borneo, East Coast Railway Link and the Kuala Lumpur- Singapore High Speed Rail.
Figure 1: Development Expenditure Allocation
10 MP 11 MP Allocation: RM230bn Allocation: RM260bn Spent:RM223.6bn 60 53.8
50 46.4 46.9 45.0 42.2 40.5 39.5 40
30
20
10
0 2011 2012 2013 2014 2015 2016 2017-2020 Source: MOF
Construction spending as a percentage of GDP has been trending higher and stood at Construction spending as % of GDP 4.9% in 2016. It appears higher than the average of other emerging countries (averaging 3.6% of GDP between 1992 and 2013 based on the studies by MGI) but within the range of developed countries in Asia and Oceania (4.6% of GDP). China’s construction spending is the highest at 8.6% of GDP. As such, we expect the current trajectory of construction spending to continue, supported especially by transportation- related jobs.
Figure 2: Construction Spending GDP 6.0 Construction GDP(RHS, bn) 70 Construction Sector as % to GDP(LHS) 5.0 60 50 4.0 40 3.0 30 2.0 20 1.0 10 0.0 0 2010 2011 2012 2013 2014 2015 2016 Source: CEIC
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Figure 3: Infrastructure Spending as % of GDP
Source: MGI
Infrastructure spending taking the lead
Total construction jobs awarded in 2016 almost matched the record-high chalked in
2014, with infrastructure jobs picking up the slack in the property sector. We believe Infrastructure spending picking up the that infrastructure spending will continue to drive the sector, with more mega projects slack from property sector in the pipeline. Infrastructure-related projects doubled to RM88bn in 2016 whilst
residential and non-residential fell 26% and 23% YoY respectively due to softer
property market. As evident in the Government’s recent budgets, the priority will be on infrastructure spending especially transportation projects such as MRT, LRT, HSR, etc. To recap, the single largest infrastructure undertaking, the MRT project in the Klang Valley, is targeted to complete its line 1 by July 2017, which we believe is a strong testament to local contractors’ execution abilities and the successful approach using the Project Delivery Partner (PDP) model. More projects are currently adopting the same approach, amongst which are MRT Line 2, LRT 3 and Pan Borneo Highway.
Figure 4: Total Awarded Jobs (CIDB)
200,000 178,819.7 176,263.4
140,733.0 150,000 127,615.8 131,038.5 99,461.6 93,294.2 85,837.1 91,008.5 100,000 74,913.7
mn MYR 50,000
0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: CIDB
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Figure 5: Jobs Awarded Contracts by Type
83,108
63,108
43,108
mn MYR 23,108
3,108
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Residential Infrastructure Non-Residential Social Amenities
Source: CIDB
Major Infrastructure Projects in 2017
1)MRT 2
With recent awards to Gadang, TRC Synergy and Acre Works, all the 10 viaduct (“V”) packages for MRT 2 have effectively been dished out. According to sources, works are progressing well and targeted to be fully completed by 2022. The line will serve a corridor with a population base of c.2m people stretching from Sungai Buloh to Putrajaya and will include Sri Damansara, Kepong, Batu, Jalan Sultan Azlan Shah, Jalan Tun Razak, KLCC, Tun Razak Exchange, Kuchai Lama, Seri Kembangan and
Cyberjaya. The proposed alignment is 52.2km of which 13.5km is underground. A total of 37 stations, 11 of them underground, will be built. The consortium of MMC-Gamuda won the RM15.5bn contract with the PDP fees set at 6% (similar to Line 1) but with three additional KPIs which will constitute about 0.5% of the 6%. We understand these are for safety, quality and response to the public.
Figure 6: Timeline of MRT2
Source: Prasarana
2)LRT 3 To recap, the Project Delivery Partner (PDP) for the LRT 3 was awarded to the joint venture of George Kent and Malaysian Resources Corporation Berhad (MRCB), with
an estimated RM9n construction cost. The 37km line connecting Bandar Utama in Petaling Jaya to Johan Setia in Klang will consist of 26 stations (25 elevated and 1 underground), 5 integrated stations and 10 park and ride facilities.
Prasarana Malaysia has begun dishing out the LRT 3 jobs, albeit smallish, with the contracts awarded in April to Mudajaya Group (RM58m contract sum) to manufacture, supply and deliver precast pier caps and WCT Holdings (RM186m) for the
construction and completion of the Johan Setia Depot (Phase 1). We understand that tender briefings for the major civil construction packages were closed recently and anticipate that the results should be out soon.
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Figure 7: Timeline of LRT3
Source: Prasarana
3) Pan Borneo Sabah Pan Borneo Highway Sabah, which has an estimated construction cost of
c.RM13bn, is a Federal Government project to upgrade road connectivity in Sabah. Phase 1 of this 706km toll-free four-lane dual carriage way project was launched by the Prime Minister in April 2016. The project is targeted to be completed by end-2021. To recap, Borneo Highway PDP Sdn Bhd (BHP) is a government- appointed project delivery partner (PDP) company to implement Phase 1 of the project. The shareholders of BHP are Warisan Tarang, MMC Corporation and UEM Group. BHP’s functions are to implement, supervise, manage and deliver the project within the time
and cost allocated. There will be, in total, 35 packages. We understand the majority of the packages will be awarded by end-2017 to ensure completion by end-2021.
Figure 8: Pan Borneo Sabah Scope of Works
Source: sabahpanborneo.com
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4) East Coast Rail Link (ECRL)
The East Coast Rail Line (ECRL) project, which was first revealed back in March
2016, could gain more traction this year with Chinese President Xi Jinping expected to visit Malaysia again and the ECRL being one of the key projects between China and Malaysia. The ECRL MOU was signed in November 2016, which confirmed the cost at RM55bn. According to news reports, construction of the ECRL will be undertaken by China Communications Construction Co (CCCC).
Financing of the RM55bn total cost will be undertaken by the Export-Import Bank of
China via a soft loan (20-year repayment). As for commencement date, the ECRL is targeted to start work in 2017 and complete in 2022 (5 years) over three phases. The first phase is for the construction of a line between Kuala Lumpur and Kuantan. The second phase involves a route from Kuantan to Kuala Terengganu, while the final phase will see the new line linking up Kuala Terengganu and Kota Baru, before terminating in Tumpat.
Figure 9: ECRL route
Source: SPAD
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5) Kuala Lumpur-Singapore High Speed Rail
A three-party consortium has won the joint development partner (JDP) contract for the
Kuala-Lumpur-Singapore high-speed rail (HSR) project, Singapore’s Land Transport Authority (LTA) and Malaysia’s MyHSR Corp announced in February this year. Under the contract, the consortium – made up of WSP Engineering Malaysia, Mott MacDonald Malaysia and Ernst & Young Advisory Services – will provide project management support and technical advice on HSR systems and operations. The consortium will also develop the technical and safety standards for the HSR. It will also help the joint project team, established by LTA and MyHSR, to prepare documents for
the coming tenders relating to the joint aspects of the project. The mammoth project, which is said to cost c.RM60bn, is expected to be completed by 2026.
Figure 10: HSR’s timeline
Timeline
February 2013
First discussions around the high-speed rail line at the Leaders’ Retreat.
December 2016
Bilateral agreement on key issues signed by Singapore Prime Minister Lee Hsien Loong and Malaysian Prime Minister Najib Razak.
EARLY 2017
Joint tender to be called for Joint Development Partner to give technical support on joint aspects of project, including interface and integration matters. Tenders for companies to provide and maintain rail assets, and to operate services, will be called at a later date.
End 2017
Tender documents for the systems package - for the actual rail track and train carriages - will be issued.
End 2018
Tenders to be reviewed after one year.
Dec 31, 2026
Start of rail operations to begin by this date.
Source: Straits Times
Figure 11: HSR’s Stations
Source: SPAD
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Figure 12: Pipeline Construction Projects
Project Estimated Value(RM bn) Expected Award
MRT 2 3.7 2017
ECRL 55 2017
Kl-Singapore HSR 40 2018
LRT 3 10 2017
Pan Borneo Sabah 13 2017
BRT lines (Sabah and Klang Valley) 2 2017
Gemas-JB Double Tracking 9 2017
WCE (remaining works) 1.5 2017
MRT 3 50 2018
Tun Razak Exchange (TRX) 5 2017
Melaka Gateway 30 end-2017
New Kuantan Deep Water Terminal Phase 2 1.5 2018-2019
Bandar Malaysia 60 2018 onwards
Menara Warisan (remaining works) 2 2017
Source: Various sources
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Valuation and Stock Picks
YTD, the FBM KL Construction index has outperformed the FBM KLCI index by c.10% and is now trading at average of c.16x, which is above its long term average mean of c.15x. The sector valuation has re-rated significantly from the lows in 2013, but still within the peak recorded in 2009/10. While valuations appear to be fairly valued, we
reckon that with the continued focus on infrastructure jobs, the jobs flow is expected to be good near-term and should bolster the stocks especially those with exposure to the high-profile projects.
Figure 13: KL Construction Index
Source: Bloomberg
Figure 14: KL Construction Index YTD
Source: Bloomberg
Construction revenue visibility is good, with the large-cap construction players such as Gamuda and IJM having revenue covers of more than 2x. Gamuda’s current outstanding order book of RM8.3bn is expected to last the Group about 2 years while IJM’s outstanding order book of RM8.6bn is c.3x construction revenue cover. Other small to mid-cap players such as WCT Holdings, TRC Synergy, Hock Seng Lee and JAKS Resources have outstanding order books that can last them from 2 to 5 years, in
our estimates.
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Stock Picks
Figure 15: Stock Performance YTD
YTD Performance(%) Hock Seng Lee 2.5
IJM Corp 10.3
Gamuda 14.6
WCT Holdings 26.0
Jaks Resources 55.9
TRC Synergy 95.2
0 20 40 60 80 100
Source: Bloomberg
. Gamuda (Outperform, TP: RM6.20), is still our favored large-cap pick for construction, as we believe it is the prime beneficiary for the transportation-related projects in the pipeline. With its track record for MRT Line 1 tunneling and Project Delivery Partner, Gamuda is well-positioned to vie for other big jobs such as LRT
3, Gemas-JB double tracking and Pan Borneo Highway Sabah in the near term. Other projects that Gamuda might participate include the High Speed Rail, MRT Line 3 and East Coast Railway Link. Gamuda’s outstanding order book now stands at RM8.3bn. With valuations rolled over to CY18, and adjustments to market value for its listed companies (i.e. LITRAK), Gamuda’s TP is upgraded to RM6.20 (from RM5.50 previously).
. Hock Seng Lee (Outperform, TP: RM1.86) is expected to have good earnings
visibility, driven by its strong outstanding order book of c.RM2.6bn. This, we estimate, will drive its construction revenue for the next 4-5 years. HSL’s expertise in civil and marine engineering enables the Group to continue to benefit from infrastructure spending in East Malaysia such as Pan Borneo Sarawak Highway and the Pan Borneo Sabah Highway plus other specialized jobs such as water/wastewater treatment facilities.
. TRC Synergy (Outperform, TP: RM0.82) is back on investors’ radar after its successful new contact win (c.RM858m contract value) secured from MRT Corp for a viaduct job for MRT2. The Group’s outstanding order book is estimated to be at RM1.8bn, ensuring earnings visibility for the next 2-3 years. Going forward, we believe the Group is still eyeing projects, which among others include LRT3 and Pan Borneo Sabah. We understand that the LRT3 tender results should be out in the next 1-2 months, and believe that TRC Synergy has a good chance to secure
at least one package, given its track record in LRT projects. Therefore, job flows for the Group is still expected to be good.
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RATING CLASSIFICATION
STOCKS
OUTPERFORM The stock return is expected to exceed a relevant benchmark’s total of 10% or higher over the next 12months.
NEUTRAL The stock return is expected to be within +/- 10% of a relevant benchmark’s return over the next 12 months.
UNDERPERFORM The stock return is expected to be below a relevant benchmark’s return by -10% over the next 12 months.
TRADING BUY The stock return is expected to exceed a relevant benchmark’s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call.
TRADING SELL The stock return is expected to be below a relevant benchmark’s return by -5% or more over the next 3 months.
NOT RATED The stock is not within regular research coverage.
SECTOR
OVERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months.
NEUTRAL The sector is expected to perform in line with a relevant benchmark over the next 12 months.
UNDERWEIGHT The sector is expected to underperform a relevant benchmark over the next 12 months.
DISCLAIMER
This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad (“PIVB”). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents.
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