June 2013 with the theme “SmallCap Contractors: The Next Big Thing?” This included 6 contractors namely Bina Puri We recently organized a Corporate Day on 18th Holdings (“BPURI”, MP, TP: RM0.78), Muhibbah Engineering (M) (“MUHIBAH”, OP, TP: RM1.63), Favelle Favco (“FAVCO”, Not Rated), Eversendai (“SENDAI”, OP, TP: RM1.68), Crest Builder Holdings (“CRESBLD”, OP, TP: RM1.73) and Ahmad Zaki Resources (“AZRB,” Not Rated). The event was well attended by approximately 35 buy-side analysts/fund managers. We gathered interests were high from the attendees and there were also a lot of positive feedbacks after the respective companies’ presentations, which featured their current operations and outlooks. Post-event, we feel that the above small-cap contractors are interesting and have good value as they have undertaken new business approaches to support their “challenging” construction margin and longer-term earnings sustainability. All in, we are reaffirming our OVERWEIGHT stance on the Construction sector. 

BPURI: Emerging property developer. We are reiterating our MARKET PERFORM rating with an unchanged TP of RM0.78 as the company is still striving to raise its profit margins. Nonetheless, BPURI still has a strong orderbook of RM1.67b, which will keep it busy for the next three years. Interestingly, it has emerged as a rail-plus property player after securing the PPP deal with Prasarana, with its project being adjacent to Tun Sambathan (GDV: RM1.3b). The CFO, Mr. David Lee, reassured that investors need not be overly concerned on the KLIA2 delay as they are expecting construction works to be completed by October with the CCC and ORAT to be completed by 30th April 2014. 

FAVCO: To continue to ride on the global robust O&G sector. The company is a well-known crane specialist both locally and internationally. Its crane outstanding orderbook as at mid-June stood at RM806m, which is a record high level and will provide earnings visibility for the next 12-18 months. Out of the sum of RM806m, 89% are from oil & gas sector. We like the company as its market is geographically spread out where it serves more than 100 countries  around the world and hence is internationally recognised. It also has strong relationship with the big O&G corporations (e.g. Keppel FELS). The management is targeting to build up FAVCO’s recurring earnings base by offering after-sales services and crane rentals to its customers. It targets to increase the revenue contribution from these services by 15% from the current 5%-10% of its revenue. On its growing cash pile, Favelle is considering M&A opportunities. In the immediate term, RM50m-60m has been allocated to build up a fleet of crane for rental purposes. NOT RATED.

MUHIBAH: To secure further sizeable Petronas jobs? Management updated that its outstanding orderbook stood at RM2.2b, of which 45% are from the oil & gas sector. Management is targeting to increase its O&G orderbook by targeting Petronas jobs. MUHIBAH noted that works for the RM60b RAPID Pengerang project would be split into 20 packages.  Pre-qualification tenders have commenced where MUHIBAH is qualified to bid for at least three packages. Each package is easily worth RM600m–RM1.0b. We believe it can secure at least one package judging from its good track record with Petronas. In addition, management is eyeing to clinch another airport concession, where it has bid for all three airport tenders in Myanmar.  Maintain OUTPERFORM with an unchanged TP of RM1.63.

CRESBLD: A contractor-cum-developer. CRESBLD’s outstanding orderbook currently stands at RM1.3b (i.e. construction: RM302m, property: RM960m) while its tender book stands at RM6b. It has ventured into its first JV with Prasarana to develop the Dang Wangi station in Jalan Ampang with a GDV of RM1b and is also a potential beneficiary of the MRT Circle Line should the line pass through its JV project with Malaysia Rubber Board (MRB) with a GDV of RM1.3b in Jalan Ampang.  Currently, it holds two property investment portfolios namely The Crest and Tierra Crest with occupancy rates of 90% and 85%, respectively, which management said it would let go at a right price. UniTapah is CRESBLD’s concession asset in which it has a 23-year concession period until 2034, where it will receive RM45m per annum beginning 2014. Although its net gearing of 1.1x unnerves investors, it is noteworthy that most of its borrowings are attached to UniTapah and its investment properties are all self-financing. In fact, the group enjoys a strong interest coverage ratio of 2.0x-2.4x.  Note that our valuation does not take into account its MRB project. Maintain OUTPERFORM with an unchanged TP of RM1.73.

SENDAI: O&G is the next revenue stream.  Its current orderbook stands at RM1.5b of which 53% are from the Middle East. The group’s target of RM2.0b revenue in 2017 is intact, which it can achieve via consistently securing RM1.0b of new contracts coupled with its O&G jobs. We believe the recent incorporation of Eversendai-Technics Sdn Bhd is a prelude to its next revenue stream as it is bidding for >RM700m fabrication-related jobs (i.e. topsides, modules and mechanicals scope of works). It is also currently setting up a fabrication yard in UAE to prepare for O&G jobs. We like the company most for its PATAMI margin of more than 11%, which is one of the highest among its peers. Maintain OUTPERFORM with an unchanged TP of RM1.68.

AZRB: Diversifying organically into O&G and Plantation. AZRB’s outstanding orderbook is close to RM2.0b. This excludes its RM1.6b KLORR highway that it recently secured (BOT). We can expect positive news for AZRB in the near term as it is eyeing to clinch another contract. AZRB is targeting to at least replenish RM700m of its orderbook in FY13. Moreover, it has organically diversified into the O&G and Plantation sectors. Currently, its bunkering business is consistently supporting its bottom line (40%  of PBT). Meanwhile, we expect its plantation arm to break even in FY15 and start contributing to the group’s bottom line in FY17 onwards. NOT RATED, but we are considering to include it in our coverage later.

Source: Kenanga