Construction sector expected to outperform in 2010

The CONSTRUCTION sector is poised to continue outperforming and could peak in the second half of this year, said HwangDBS Vickers Research.

It said the sector would peak later this year underpinned by the full rollout of three mega projects — the new low-cost carrier terminal, the Pahang-Selangor water transfer project and the Ampang and Kelana Jaya light rail transit (LRT) line extensions.

In addition, foreign contract flows are expected to buoy the sector, with notable markets in the Middle East (ex-Dubai) and India.

Moreover, the outperformance might spill over into 2011, hinging on factors such as the rollout speed of the new Cheras-Damansara LRT line, earnings deliverance, and the pace of new orderbook wins, the research house said in a report yesterday.

"Wildcards are more questionable projects such as the RM48 billion bridge connecting Indonesia, RM28 billion high speed railway and intermodal freight system, RM7 billion bullet train and third link/mass rapid transit (MRT) to Singapore," it said.

HwangDBS Vickers added that the current transition between major national economic blueprints would further boost the sector, as it drew comparisons from the sector's performance at the onset of the Ninth Malaysia Plan (9MP) in 2006.

The 9MP is drawing to a close this year while the 10th Malaysia Plan (10MP) is expected to be tabled in June.

Back in 2006, the trough-to-peak period for the sector was 32 months versus the current 13 months, and the research house said the sector generally outperformed the stock index during this period.

"Price/earnings multiples of our universe also peaked to 40 times versus the current one-year forward average of 14 times," Hwang-DBS Vickers said.

"With the full year of new leadership paving the way for more aggressive contract flows coupled with the still conducive cost environment, we expect further outperformance."

Furthermore, the research house expects private finance initiatives (PFI), off-budget and public-private partnerships to make up for any shortfalls in 10MP development expenditures, anticipated at RM180 billion.

"We also view positively the foreign participation from China contractors for three key local projects, aiding funding woes, hastening the pace of contract awards as well as spillover effects for our local contractors," it said, adding that a precedent was set with the Pahang-Selangor water transfer project and Seremban to Gemas double-tracking project.

One of its sector big-cap picks is IJM CORPORATION BHD [], due to:

1. i) its modus operandi of bidding for a large pool of contracts giving it the highest probability of orderbook replenishment;
2. ii) strong beneficiary of move to an open tender system; and
3. iii) diversified earnings base.


"We also like MRCB (MALAYSIAN RESOURCES CORP []oration Bhd) given its scarcity premium as a GLC listed contractor and we think its proposed one-for-two rights issue is a precursor to sizeable government land deal.

"Given its success with KL Sentral and strong shareholder backing from the Employees Provident Fund (EPF), we are confident that this will come to fruition," it said.

The research house also picked GAMUDA BHD [] and SUNWAY HOLDINGS BHD [] as big-cap and small-cap options, respectively.