Highlights

• Ramping up in 2015. Development expenditure is targeted to increase strongly by 15% YoY in 2015 to RM48.5bn. This is significant considering that YoY changes for 2011 -2014 only ranged between 1% to -12%. Given its high correlation (81%) to development expenditure, growth in nominal construction output is expected to be strong.

• Growth outperforms. Real construction growth has outperformed overall GDP since 1Q12. Our economics team projects this to continue in 2015 with construction growth at 10% on back of GDP of 4.8%.

• Robust contract flow s. Domestic contract awards to listed contractors were robust with 2014 amount at RM17.9bn, displaying a 16% YoY growth.

• 11MP an overlooked catalyst. The 11MP (2016 -2020) will be unveiled in May 2015. This will be the most critical Malaysia Plan as it ends in 2020, the target timeline to achieve a “high income nation ” status. Similar to past plans, we expect some excitement for construction.

• Mega projects in the pipeline . The key mega projects that we expect to be rolled out over the next 1-2 years include the MRT Line 2 (RM23bn), LRT Line 3 (RM 9bn) and Warisan Merdeka (RM3bn). There are also a variety of highways such as the open tender portion of the WCE (RM2.2bn), SUKE (RM4bn) and DASH (RM4bn).

Risks

• Conc erns are rife that low oil prices would lower Government revenue which may lead to a cut in development expenditure to ensure the fiscal deficit target of 3% is met.
• We believe that lower oil revenue will be offset by savings from the removal of fuel subsidies. The strong development expenditure increase for 2015 has also been paired with flattish operating expenditure. Our economics team estimates that development expenditure growth will come in flat should crude oil price average US$63 for 2015.
• Even if development expenditure is cut, this should not adversely impact the roll out of mega projects as they are mostly implemented “off balance sheet” by the Government.

Rating / Valuation

• OVERWEIGHT
• We retain our OVERWEIGHT rating on construction premised on 3 catalysts: (i) ramp up in development expenditure, (ii) continued roll out of mega projects and (iii) unveiling of the 11MP.

Top Picks

• Gamuda (BUY, TP: RM5.67 ) is our top pick amongst the large cap contractors. The roll out of MRT line 2 , news flow on the Penang Trans port Masterplan and resolution to the Selangor water saga are key catalysts.
• For the small caps, we like Mitrajaya (BUY; TP: RM1.52) which sits on a strong orderbook cover of 7x coupled with growing property contribution. The mark et has also overlooked the value of its landbank.

Source: Hong Leong Investment Bank Research - 8 Jan 2015