Highlights

Prices jumps as expected... With Barisan Nasional retaining its majority to form the Government, the huge upwards reaction in construction stock prices yesterday was within our expectations (please refer to our report “Election kneejerk” dated 22 Jan-13 and “Election risks largely priced in” dated 13 Sep-12).

Better values in smaller ones... Yesterday’s strong surge in share prices saw most of the larger counters reaching close/exceeding our Target Prices and is currently trading at 14-15x P/E multiple, which is close to the KLCI’s P/E multiple of 16x. Hence, with the increase in risk appetite and liquidity, we believe that the mid/small cap and laggards will receive attention as highlighted in our report “Going small” dated 10 Apr-13. This segment is also still trading at palatable valuations at 8-9x P/E, hence the risk-rewards ratio are better justified.

Continuity of developments... With the same ruling Government, we expect both clarity and continuity of the development projects proposed. We believe RM50.3bn worth of key potential projects will excite the sector in 2013.

Privatisation of concessions... Another compelling catalyst will be the potential privatisation of toll and water assets, whereby the decision to privatise it was postponed till post-election. These will particularly benefit Gamuda and MRCB.

Some political risk... There still is an element of political risk albeit much more subdued due to the reshuffling of portfolios assigned to the respective political leaders. However, we believe that this risk has been largely discounted into the sector especially for the mid/small cap stocks.

Fundamentally healthy... While waiting for the prospects to materialise, most construction players will be busy executing their outstanding order book which provides earnings visibility over the next 2-3 years. Hence, new projects awarded will further bolster the sector’s fundamentals.

Catalysts

• Upgrades: Higher than expected project values; faster than expected implementation of projects.
• Downgrades: Delays in rolling-out new projects; reemergence of political risk.

Risks

Execution risk; regulatory and political risk; rising raw material prices; and unexpected downturn in the construction and property sector.

Rating/ Valuation

OVERWEIGHT

Maintaining OVERWEIGHT stance in the sector but with emphasis on the mid/small cap and laggard construction companies given the more palatable valuations compared to the big caps.

Top Picks

• Kimlun (BUY; TP: RM2.18)
• HSL (BUY; TP: RM2.09)
• Mudajaya (BUY; TP: RM3.53)
• MRCB (BUY; TP: RM2.15)

Source: Hong Leong Investment Bank Research - 07 May 2013