We remain OVERWEIGHT on the construction sector. This follows our channel  checks  that  substantiate,  to  a  certain  extent,  a  news  report stating that  Line 2 of the Klang Valley MRT  project has been approved by  the  Government.  The  construction  sector’s  strong  prospects  are backed  largely  by  the  MYR73bn  MRT  project.  Our  Top  Picks  for  the sector are Gamuda, Protasco and Hock Seng Lee.

• Cabinet’s go-ahead for  Line 2?  We carried out some channel checks following  a  news  report  in  The  Star  yesterday  quoting  MRT  Co  CEO Datuk  Wira  Azhar  Abdul  Hamid  as  saying  that  the  Government  had approved Line 2 of the 3-line Klang Valley MRT project. The 56km Line 2, also known as the Sg Buloh-Serdang-Putrajaya Line, is estimated to cost MYR25bn (Line 1: MYR23bn). Its implementation will ensure continuity in MRT construction activities, with civil works for Line 1 tailing off by mid-2015.  A  source  of ours who is in the know  told  us that the Cabinet has indeed  approved Line 2  and the  appointment of  the  MMC-Gamuda  joint venture (JV) as the project delivery partner (PDP) – as in the case of Line 1  –  although the Government, as well as  MRT Co,  have yet to issue any official statements  on this.  While Cabinet approval  for Line  2  was earlier expected to come by 1Q14, we believe the market will still react positively should it finally happen. This will  put to rest concerns  over further delays in getting Cabinet approval for Line 2 – something that has been delayed by about nine months now.
• Maintain  OVERWEIGHT.  The  prospects  of  the  construction  sector remain strong as it rides on what we believe is an extended upcycle  that is  backed largely  by  the  MYR73bn  Klang  Valley  MRT  project. With  the MYR23bn  Line 1 currently under construction,  and Lines 2  and  3 worth MYR25bn each under planning, this mammoth mega project will keep the players  busy  until  2021.  We  advocate  a  two-pronged  stock-picking strategy. Firstly,  go for the  high-beta highly liquid  big-cap Gamuda  (GAM
• MK, BUY, FV: MYR5.45), which will take the lead in reacting to new price catalysts like the Cabinet approval for Line 2. Secondly, look at small-cap stocks like: i) Protasco (PRTA MK, BUY, FV: MYR1.80) that is benefitting from  other  key  areas  of  public  infrastructure  spending,  particularly  in public road maintenance and public housing, and ii) Hock Seng Lee (HSL MK, BUY, FV: MYR2.06), which is a good proxy to massive infrastructure spending  in  Sarawak  backed  by  the  Sarawak  Corridor  of  Renewable Energy (SCORE), urbanisation and rural development.

Source: RHB