• KL Construction index has fallen 50% in 2018, to 155 points by mid Dec, the lowest level seen over 10 years. Despite limited earnings prospect, we reckon there are hidden values within.
• We advise investors to be selective and seek refuge in stocks with the following criteria: i) good cash reserve, ii) multi-year earnings visibility, and iii) steady job flows from affiliated companies.
• We like Sunway Construction and Kerjaya Prospek as both companies are in net cash, outstanding orderbook with earnings visibility of 2-3 years and are able to sustain good job flows from affiliated companies amidst the sector’s poor outlook in the near to medium term.
• We initiate coverage on Kerjaya Prospek (BUY, TP: RM1.40) and Sunway Construction (BUY, TP: RM1.60) while we are also positive on Gamuda (BUY, TP: RM3.35) for its good earnings visibility and diverse income source which includes concession businesses.

A watershed year for Construction

The KL Construction Index has lost some 50% of its value in 2018 following the unexpected outcome of the 14th General Election (GE14) and the subsequent initiatives taken by the Federal Government to review existing mega infrastructure projects. These clearly dampened optimism towards the sector given its strong links to fiscal policies. Cost optimisation measures by the Federal Government led to various mega projects being either shelved, reprioritised or re-scoped to lower development expenditures.

Our selection criteria

Despite the setback in the sector’s outlook, we see value in select stocks as the share price pullback implies limited downside risk. Our selection criteria require fulfilment of at least 2 of the 3 parameters which are: i) good cash reserve to sustain working capital needs should there be progress billing delays, ii) multi-year earnings visibility which enables the company to provide some dividends, and iii) steady job flows to ensure decent earnings level (ie. flat or minor declines).

We initiate on Kerjaya Prospek and SunCon

We initiate coverage on Kerjaya Prospek (BUY, TP: RM1.40) and SunCon (BUY, TP: RM1.60) which fulfil all 3 criteria satisfactorily. With Kerjaya, c.64% of its 2018 orderbook was secured in 2H18, partly on the back of its cashpile which builds on its strong track record with prospective clients; existing orderbook provides earnings visibility for the next 2-3 years and job awards secured from its network of affiliated companies. Similarly, SunCon is in net cash position which stands at 18% of its market cap; in 2018, RM1.5bn of its orderbook replenishment was from Sunway Group – the latter also has 3,283 acres of landbank with potential GDV worth RM54.4bn while its township development model also involves a wide array of segments including Healthcare and Retail; SunCon’s existing orderbook offers earnings visibility for the next 2-3 years with historical dividend payout usually exceeding its 35% dividend payout policy.

Source: BIMB Securities Research - 31 Dec 2018