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Remain overweight. Construction stocks under our coverage have gained 9% to 35% y-t-d led by Hock Seng Lee (HSL; +35%) and Sunway (+21%), outperforming the FBM KLCI 30’s +4%. News flow should pick up in the coming months, driving share prices further. Our top pick is WCT, which should benefit from its multi-presence in the Middle East, East and Peninsular Malaysia. We recently upgraded IJM to a “buy”, and remain Buyers of Gamuda, Sunway, HSL and Loh & Loh.
A quiet 1Q2010. As expected, 1Q2010 was quiet in terms of project awards as pre-qualifications, tenders and evaluations were ongoing. Except for IJM which firmed up the supplementary Besraya concession leading to RM600 million worth of works, and Sinohydro-Loh & Loh JV which won the RM828 million Hulu Terengganu hydroelectric project civil works, there were no significant construction wins (>RM500 million). Our records show RM3.1 billion of domestic job wins in 2010-y-t-d (Table 1) versus RM9.7 billion in 2009.
News flow building up. Last week’s award of two roads leading to the Murum Dam in Sarawak worth RM247 million lifts hopes that the remaining 2-3 Murum road packages would be awarded soon. Likely beneficiaries are HSL and Loh & Loh. Edge Weekly this week reports that Syarikat Prasarana Negara would announce the main contractors pre-qualified (pre-Q) for the first package of the Klang Valley LRT extension (Kelana Jaya line) soon an award is expected in two months. We believe tender exercises typically follow the pre-Q. Six players including UEM, IJM and Putrajaya Perdana are in the running. We understand that WCT, Gamuda and Sunway have also participated in the pre-Q.
Water, LCCT jobs to also roll out. The groundbreaking ceremony for the Pahang-Selangor water transfer project was held on April 6, 2010, 11 months after the letter of acceptance was given for the RM1.3b tunnel works package (in May 2009) to Shimizu-Nishimatsu-UEM-IJM JV. The pumping station package worth RM300 million is close to being awarded to a Japanese-led consortium. At the Sepang LCCT project, the award for the main terminal and satellite building works worth RM1 billion is pending – the press reported in February that five contractors have been shortlisted.
Mini-themes. As we have explored in our sector update early this year,2010 would be a year of events; themes are the unveiling of the 10MP and the run-up to the Sarawak State Election. The 10MP would be unveiled in Jun 2010, which would see a larger private sector role in the form of PFI projects. We expect higher development spend for East Malaysia under the 10MP supported by the New Economic Model’s high-income society target. The Sarawak State Election (due by May 2011) and SCORE should continue to drive interest in Sarawak stocks.
