*SWITCH IN ANALYST COVERAGE*

As Malaysia gradually recovers from the Covid-19 pandemic, we believe the Malaysian government will gradually pivot their focus onto economic recovery measures for the mid to long-term horizon. Drawing experience from historical lessons, we are convinced that construction will be a key lever for the government to kick start the recovery and it is a matter of time before the sector will undergo a blanket re-rating.

Therefore, we feel timing is now right to start accumulating construction names in anticipation for a rally. We reckon that the rally will come somewhere in late August to November after (i) the weak 2QCY20 reporting season (MCO peak) is being flushed out and (ii) market begins to pivot their attention onto goodies from Budget 2021 and the 12th Malaysian Plan. Our KLCON study indicates potential upside of 30% from current levels. We have categorized our coverage into 5 groups:

1. The Safe Bets: Gamuda (OP; RM4.30), Suncon (OP; RM2.45), Kerjaya (OP; RM1.45);

2. Bargain Galore: Hsl (OP; RM1.25), Muhibah (OP; RM1.20), Kimlun (OP; RM1.00);

3. Contrarian Buy: MRCB (OP; RM0.75);

4. Tactical Trades: WCT (MP; RM0.55), IJM (MP; RM2.00) and;

5. Stay away: Mitra (MP; RM0.20), Gkent (UP; RM0.51).

On the earnings front, we have aggregately reduced FY20E earnings by 20% to cater for the MCO impact; but lift FY21E earnings by 4% on deferred works. We expect the upcoming 1QFY20 earnings to greatly disappoint the market – but we see an opportunity to accumulate. Maintain Overweight.

Construction has been a relative outperformer post-crisis, historically. Looking back, the construction sector exhibited strong recovery relative to other sectors during the AFC (Asian Financial Crisis) and GFC (Global Financial Crisis) periods. During AFC, KLCON gained 394% from its bottom within a year; while it gained 81% during the GFC. We think current climate is no different from then. Currently, KLCON has gained a commendable +47% from YTD lows and we think there might be more upside ahead as further catalytic news flow emerge.

Source: Kenanga Research - 2 Jun 2020