Touring KVMRT2 Line with Ho Chin Soon. In May-13 Gamuda revealed the proposed KVMRT Line 2 (Red Line: Sg Buloh – Serdang - Putrajaya) and KVMRT Line 3 (Green Line) alignment but MRT stations are only made known for Line 2. The approvals for KVMRT Line 2 are expected to be in Jul-13 with tenders as early as 2015. Together with Ho Chin Soon, we toured KVMRT Line 2 alignment and stations to determine the major differences against KVMRT Line1 (Sungai Buloh – Kajang). 

The MRT play continues to bode well for the property sector as it narrows the gap of KL’s CBD property values and Klang Valley suburbs. The key difference between MRT1 and MRT2 is that the latter is more residents driven and has lower commercial catchments. MRT2 also enjoys more existing public transportation connectivity. Areas near MRT stations which scored well on our score card analysis are those with main interchanges, strong commercial content, middle portion of the MRT line and those with strong future development potentials. Key developers under our coverage that have projects near MRT2 stations are; IJMLAND’s (OP; TP: RM3.50) and SPSETIA (MP; TP: RM3.80).  Other developers that will benefit from close proximity to Line 2 stations are  YTL Land (NOT RATED), Wing Tai (NOT RATED), Sunway (NOT RATED), Boustead Holdings (MP; TP: RM5.52), Ekovest (NOT RATED) and Country Heights (NOT RATED). (Refer overleaf for details). 

A new breed of developers. The MRT play will likely give way to new plays, like rail-plusproperty developments as MRT Co is likely to adopt  the Public-Private Partnership (“PPP”) model, as seen with Prasarana. We reckon it makes more sense for these projects to be undertaken by contractor-based developers. Besides less transfer of pricings, the contractors can negotiate the rail-plus-property project and the MRT contract on a bundled-package deal, while these contractors need not worry about bearing land costs in their balance sheet. Examples of rail-plus-property projects by Prasarana are Crest Builder (OP; TP: RM1.73), TRC Synergy (OP; TP: RM0.75) and Bina Puri (MP; TP: RM0.78).

Contractors’ earnings visibility becoming brighter  with MRT2. If MRT2  is  implemented, going forward, we expect contractors’  earnings visibility becoming brighter, especially for those contractors who currently undertaking the MRT1 project. This is due to the 1) MRT1 contractors’ familiarity of the project and 2) cost competitive advantage (i.e. reduced mobility costs, higher efficiency on staff/workers). Our concern is only on the building material prices may go higher due to inflation.

Maintain OVERWEIGHT on Property. We are in the midst of reviewing our CALL/TPs for developers; currently, we have an  OVERWEIGHT on developer sub-segment and our CALL/TPs are as follows:  UEMLAND (OP; TP: RM4.62), SPSETIA (MP; TP: RM3.80), IJMLAND (OP; TP: RM3.50), MAHSING (OP; TP: RM3.65), UOA (MP; TP: RM2.60), HUAYANG (OP; TP: RM3.52), HUNZA (MP; TP: RM2.40) and CRESCENDO (OP; TP: RM3.56). 

Reiterate OVERWEIGHT on Construction. We are maintaining our bullish stance on the sector after visiting the potential MRT2 alignment and stations. We reaffirm our view that the sector enjoys; 1) clear orderbook replenishment visibility as the government resumes all the plans under the ETP and 10MP post GE13; 2) expectation of positive announcement and news flows of infrastructure projects (i.e. MRT2, HSR, Klang Valley Double Track, roads & highways, ports) which will spur investors’ interests in the sector; 3) risk premium no longer valid since GE13 outcome favours contractors.  Our top pick in the large cap space remains as Gamuda (OP: TP: RM5.20). We also like Eversendai (OP; TP: RM1.68) as its valuations are unjustifiably low given the fact it is a strong proxy to the robust Middle East construction space while it has strong financials (i.e. amongst the highest margin in the sector).  Other than that, our other Calls/TPs are as follows: Benalec (OP: TP; RM2.08), Fajar Baru Builders (OP: TP; RM0.82), Kimlun Corp (OP: TP; RM2.28), Muhibbah (OP: TP; RM1.63), Naim Holdings (OP: TP; RM4.45), TRC Synergy (OP: TP; RM0.75), Bina Puri (MP: TP; RM0.78), IJM Corp (MP: TP; RM5.90), MMC Corp (MP: TP; RM2.67), MRCB (OP: TP; RM2.08) and WCT (MP: TP; RM2.61).

Source: Kenanga