We are raising fair value to MYR1.45 from MYR1.35 and maintaining our Buy call to reflect the reduced risk premium following the victory of the Barisan Nasional coalition in the 13th general election.  The sector will now steer clear of potential radical changes proposed by the Pakatan Rakyat coalition that could have hurt earnings and fundamentals including a review of MRT-related contracts and abolition of toll roads.

♦  MRT project is now safe.  The risks of cancellations, changes to terms and scopes of MRT-related contracts are now greatly reduced.  They could have reverberated along the value chain, hurting right from project delivery partner or PDP (MMC-Gamuda JV), tunneling contractor (MMC-Gamuda JV), viaduct/station/depot contractors (IJM, Sunway, Mudajaya, TRC, TSR, Naim, Gadang, UEM, Ahmad Zaki, MTD, Gabungan AQRS), to a long list of smaller and mostly privately-owned contractors as well as suppliers of segmental box girders and tunnel lining segments (Kimlun).   

♦  Toll roads are safe as well.   Similarly, the risk of existing concessionaires not being adequately compensated pursuant to the nationalisation of their toll roads is now greatly reduced.  Among the construction companies under our coverage, Gamuda and IJM have the most toll roads under their belts.  For toll roads under planning, similarly, the risk of them being cancelled is now greatly reduced as well.  These include the RM7bn West Coast Expressway (WCE) of Kumpulan Europlus/IJM and East Klang Valley Expressway (EKVE) of Ahmad Zaki. ♦  Sector target PER raised.  We reflect the reduced earnings risk and risk premium for the sector by upgrading our 1-year forward target PER for construction stocks to 10-16x from 8-13x.  AQRS’s fair value is raised to MYR1.45 (based on 10x FY14 EPS), from MYR1.35 (based on 10x FY13 EPS).  Maintain Buy.

Source: RHB