Construction sector

Maintain overweight: We came away from our visit to Iskandar Malaysia feeling generally positive about its progress. While it is true that property is a more attractive investment theme for investors there, we are heartened by the likelihood of more construction/infrastructure jobs for Iskandar. This is positive for contractors but limited somewhat to the efficient, low-cost players. We maintain our earnings forecasts, target prices and recommendations for all the contractors under coverage. The sector remains an "overweight", supported in the main by the implementation of mega public transport projects. We maintain our "outperform" call for our top picks, Gamuda and WCT.

Iskandar is now in Phase 2 of its strategic road map. Demographics-wise, critical mass is expected to be achieved in 2025 when the population is targeted to hit three million, compared with 1.6 million currently. Between 2006 and last May, Iskandar has attracted investments totalling RM61 billion, exceeding the end-2010 target of RM47 billion. Local investments make up 55% of the total, higher than last year's 54% and 2008's 45%. Foreign direct investments (FDI) constituted 45% of total investments.

We were encouraged to learn that more construction/infrastructure jobs are in the pipeline. Iskandar Investment Bhd (IIB) indicated earlier this year that up to RM2 billion worth of projects are expected to be rolled out in 2010, higher than the RM1.1 billion in 2009. We gather that the potential new jobs will mainly be in Medini, the next growth area after Nusajaya.

Since May 2009, over RM2.2 billion worth of projects have been awarded to several contractors. The largest contract was the RM767 million earthworks package in Medini awarded to WCT, while the latest venture is by Bina Puri which will undertake a RM500 million commercial development, also in Medini. The remaining construction/infrastructure works in Iskandar will largely be awarded on open tender basis. Although each package is likely to be small to mid-sized, it is still positive for order book replenishment.

We reiterate our "outperform" call on Gamuda as the group is likely to emerge as the main winner of the RM36 billion proposed MRT project. A decision by the Cabinet is now expected to come through in October at the earliest instead of August. Gamuda's inclusion in the FBM KLCI is not only timely but is also positive as it enhances the stock's profile. We also maintain our "outperform" on WCT as it provides the best exposure to Middle East jobs and is likely to announce a contract win worth over RM1 billion soon. We do not discount the possibility that it may clinch more open tender jobs in Iskandar. - CIMB Research, Sept 20


This article appeared in The Edge Financial Daily, September 21, 2010.