Results Highlights

• Skewed towards disappointments. For the recently concluded 3Q15 results season, cont ractors under our coverage saw an equal number of those reporting earnings that were inline and below at 5 each (42% each) while only 2 (17%) came in above. Based on our coverage universe, consensus witnessed slightly higher disappointments at 6 (50%), 5 inline (42%) and 1 (8%) above expectations.

• Margins the culprit. Of the 5 result disappointments, margin weakness was the key culprit for 4 which include WCT (provisions for its Qatar job), Eversendai (India job halted and accelerated cost for Tg Bin), HSL (more open tender jobs) and SCable (time lag in passing on USD cost).

• Few positive surprises. Only SunCon and Kimlun registered results that beat expectations. The former was assisted by lower effective tax rate while the latter experienced strong margin expansion resulting from fewer subcontracts and higher contribution from its Singapore precast jobs as opposed to the MRT1 last year.

• Healthy orderbook levels. Following strong job wins in 2014-2015, the orderbook of most contractors within our coverage remains healthy with some hitting all -time highs (e.g. IJM and MRCB). We favour contractors with high orderbook cover ratios (i.e. orderbook balance/ historical construction revenue) as they provide a strong degree of earnings visibility. We have BUY ratings on IJM, SCable, MRCB and Mitrajaya which are the top 4 in terms of having the highest cover ratio.

• Robust year for job wins. Domestic contract awards to listed contractors have been robust at RM21bn YTD (as at 2 Dec). This is the 2nd highest sum posted in the past 8 years. The previous high was recorded in 2012 at RM28bn when the bulk of the MRT1 contracts were awarded. With the impending roll out of the MRT2 and LRT3, we reckon that 2016 could set a new record for job wins.

Risks

• A space to watch out for is the softening domestic property market, leading to slower private sector contracts as developers scale back on launches.

Rating

• OVERWEIGHT
• While disappointments continue to dominate results, we remain upbeat on the outlook for contractors given thei r sizable orderbooks and robust job wins.
• As earlier articulated, 2016 could potentially be a record year for job wins with the roll out of sizable contracts such as the MRT2, LRT3, Pan Borneo Highway and several urban highways (e.g. SUKE, DUKE and SKLIA).

Top Picks

• For the large caps, IJM (BUY, TP: RM3.86) is our top pick given its record high orderbook of RM6.7bn which implies a superior cover ratio of 7.5x.
• Amongst the small caps, we continue to advocate buying into Mitrajaya (BUY, TP: RM1.95) which boasts superior earnings growth with 3 year CAGR of 24%, underpinned by its RM1.6bn orderbook (4.3x cover ratio).

Source: Hong Leong Investment Bank Research - 8 Dec 2015