Malaysia’s construction sector to see recovery

Malaysia 28 Jan 2015
Malaysia’s construction sector to see recovery

KUALA LUMPUR: CIMB Equities Research expects investor sentiment in Malaysia’s construction sector to likely gradually recover.

“We like Gamuda (our top big-cap pick) for its exposure to Mass Rapid Transit (MRT) and Penang transport infrastructure. Muhibbah Engineering, our small/mid-cap pick, remains oversold but offers unchanged order book growth potential.

“We upgrade Benalec from reduce to Add. Maintain Overweight,” it said on Wednesday.  On the previous day, the company announced it had received the Department of Environment’s nod to start its reclamation for its Tanjung Piai petroleum hub and industrial park in the Straits of Johor.

To recap, CIMB Research said the KL Construction Index outperformed the FBM KLCI in 2014, but with a marginal growth of 0.4% versus KLCI’s decline of 5.7%.

Construction stocks under its  coverage declined 8% on average. The larger cap contractors performed relatively better compared to the smaller caps.

“Looking into 2015, the bulk of the infra projects in the pipeline are largely private-sector driven and should not be directly impacted by the reduced oil price. Major government-initiated projects of national interest should continue to stay on the cards.

“On the flipside, due to the cheaper raw material cost environment (fuel, cement and steel), this would be a good time for the government and private sectors to implement projects. We remain optimistic about Petronas’s-funded projects that have received the final investment decision (FID), mainly the ones in Rapid and Pengerang,”  it said.

The total RM150bil worth of projects is arguably the sector’s highest value of outstanding projects at any one time in the last decade.

“Based on our analysis, 75% of the total 16 major jobs carry a low risk of cancellation, deferment or delays while the balance 25% shows medium to high risk mainly due to 1) financial closure, 2) funding structure, 3) project structure and 4) bilateral agreements for cross-border contracts,”  it said.

CIMB Research continues to like Gamuda as MRT 2 (PDP and underground contract), PTMP and a better valuation for the divestment of Splash are key rerating factors.

Muhibbah has been oversold with an unchanged order book outlook. In our view, chances of securing packages from RAPID in the medium term look good. In its small cap space, it upgraded Benalec from Reduce to Add.

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