Stock Name: NAIM
Company Name: NAIM HOLDINGS BHD
Research House: OSK

Construction sector
Maintain overweight: During 4Q10, RM6.3 billion worth of construction contracts were awarded, of which 75.1% were for domestic jobs. Domestic contract flows from October to December remained robust at RM4.7 billion (+48.5% year-on-year) as various packages of the LRT project extension were dished out. On a quarter-on-quarter basis, the value of domestic job flows was 16.2% lower, mainly due to the high base effect in 3Q as a result of the sizeable RM2.4 billion Sabah O&G Terminal (SOGT) award. For FY10, domestic contracts totalled RM15.6 billion, representing a strong 55.8% y-o-y jump and exceeding our RM13 billion target.

We believe the momentum of domestic job flow will be sustained this year and set our 2011 target at RM18 billion. This is expected to be fuelled by: (i) the possibility of an early general election; (ii) projects under the Economic Transformation Programme (ETP); and (iii) more private sector developments.

Overseas jobs for the quarter stood at RM1.6 billion, which was significantly higher y-o-y and q-o-q. The bulk was attributed to the RM1.4 billion administrative building in Qatar secured by WCT. However, for FY10, overseas contracts fell by 21.2% as the proportion of foreign-based contracts fell from 37.3% in 2009 to 23.1% in 2010. We find this unsurprising as many contractors had previously stated that they are refocusing their resources on Malaysia given the increasing number of domestic jobs. For 2011, we expect overseas awards to increase y-o-y, driven by more jobs from India and the Middle East.

The strong 55.8% y-o-y increase in domestic contract flows validates our 'overweight' call on the construction sector. We believe that our RM18 billion domestic jobs win target for 2011 could be breached should the various projects under the ETP kick off faster than expected. Given the likelihood of an early general election this year, we expect the momentum of news flow within the sector to accelerate. The KL Construction Index currently trades at 13.4 times forward earnings, equivalent to its long-term mean. Amid the more positive news flow, we expect valuations to re-rate to one standard deviation above mean at 16.4 times.

Our top sector pick is Gamuda ('buy', target price: RM4.78) for its MRT exposure with its Vietnam property launches and resolution of the water assets consolidation as the wild card. For the small caps, we like Ahmad Zaki ('buy', TP: RM1.55), which has a three-year earnings compound annual growth rate forecast 30.8%. In view of the state elections which must be held by May, we continue to like the Sarawak theme and highlight sector laggard Naim Holdings ('buy', TP: RM5.10). Investors may also consider looking at Iskandar construction plays, with Kim Lun (NR) as a key proxy. ' OSK Investment Research, Jan 5


This article appeared in The Edge Financial Daily, January 6, 2011.