Construction (Overweight '')

1H11 results review

'''' For the 2Q results, IJM came in slightly below street's estimates while Gamuda's earnings were surprisingly strong due to higher construction margins and stronger property contribution. On the other hand, WCT missed expectations due to flattish construction activities. In general, the mid-to-small cap construction counters within our coverage came in within estimates.

'''' As for 2Q GDP construction numbers, growth was unexpectedly weak, growing marginally by 0.6% YoY from 3.8% in 1Q (4Q: 5.6%). Hence, we have cut our growth forecast for the sector further from 6.5% to 4.4% (8.0% was forecasted at the beginning of FY11). Going forward, 3Q and 4Q historical numbers tend to be stronger.

'''' Although the construction sector did not grow as fast as anticipated, we believe that it is due to timing recognition issues. In view of potential projects stemming from the ETP, we remain our OVERWEIGHT stance on the sector.

'''' We continue to prefer the mid-to-smaller cap companies over larger caps as their exiting order book provides clearer earnings visibility while valuations look undemanding. In line with our lowered FBM KLCI target P/E of 14x, we cut our assigned construction P/E to 14x for the larger cap counters and 12x for the mid/smaller cap companies.

'''' Our top picks for the sector are Mudajaya, HSL, Gamuda and WCT.

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FBM KLCI - Europe's headwinds to dampen sentiment

'''' Near term FBM KLCI outlook remains hazy amid external woes and disappointing CY2Q11 reporting season. Immediate support levels are 1445 (lower Bollinger band), YTD low of 1423 and 1400 psychological mark while resistance zones are situated near 1470 (10-d SMA), 1484 (mid Bollinger band) and 1500 psychological mark.

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Stock to watch - AIRASIA: Potential rebound targets at RM3.58-3.69''

'''' Despite recent plunge, its medium to long term uptrend remains intact as share prices continue to stay above the 200-d SMA and lower Bollinger band. Immediate resistance levels are RM3.58 (50-d SMA) and RM3.69 (30-d SMA). Supports are RM3.26 (100-d SMA) and RM3.19 (lower Bollinger band). Cut loss below RM3.19.''

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