Despite  lower  oil  revenue,  the  Government  has  decided  to  maintain development expenditure at MYR48.5bn in its revised Budget 2015. We maintain our OVERWEIGHT stance on the construction sector. Our top themes  and  corresponding  stock  picks  are  the MYR73bn  Klang  Valley Mass  Rapid  Transit  (MRT)  (Gamuda  and  Kimlun  Corp),  the  MYR27bn Pan-Borneo Highway (Naim Holdings) and piling (Pintaras Jaya).

Construction  sector  is  spared.  Contrary  to  market  expectations,  the construction sector has emerged relatively unscathed from the revisions in  Budget  2015  announced  by  Prime  Minister  Datuk  Seri  Najib  Razak yesterday.  Despite  lower  oil  revenue,  the  Government  has  decided  to maintain  gross  development  expenditure  at  MYR48.5bn,  which  is  up 15%  from  the  MYR42.2bn  estimated  for  2014.  To  recap,  the  biggest recipients  of  the  allocation  are  rural  infrastructure  (including  the  Pan-Borneo Highway), water projects (including the MYR3bn Langat 2 water treatment plant), affordable housing and property/facility maintenance.

Allocation  to  repair  flood  damage  and  for  flood  mitigation.  In  the revised Budget 2015, the Government has also allocated MYR800m for repair  and  reconstruction  of  basic  infrastructure  such  as  schools, hospitals,  roads  and  bridges  in  flood-stricken  states. We  believe  this is likely to be split into many small packages that will largely benefit smaller privately-owned contractors. There is also an allocation of MYR893m for “flood mitigation measures”.  We  believe  Malaysian  Resources  Corp (MRC MK, NEUTRAL, TP: MYR1.40) may stand to gain, given its track record  in  coastal/river  rehabilitation  projects  in  the  east  coast  of  West Malaysia.  A  privately-held  company  which  holds  the  concession  to dredge  ports  and  harbours  in  Malaysia  could  also  stand  to  benefit  by 
virtue of its fleet of specialised marine equipment.

We maintain OVERWEIGHT  on the  construction  sector. We  believe the current strong momentum of activities will be sustained, backed by a long list of ongoing and shovel-ready mega public infrastructure projects. Our top themes  and  corresponding  stock  picks  are: i) the  Klang  Valley MRT – Gamuda (GAM MK, BUY, TP: MYR5.35) and Kimlun Corp (KICB MK, BUY, TP: MYR1.68), ii) the Pan-Borneo Highway  – Naim Holdings (NHB MK, BUY, TP: MYR4.88), and iii) piling – Pintaras Jaya (PINT MK, BUY, TP: MYR4.92).

Source: RHB