Key highlights from ICW 2012 seminar

• We attended the 8th Malaysian Construction Industry Review and Outlook Seminar in conjunction with the 13th International Construction Week (ICW) 2012 held by the Construction Industry Development Board (CIDB). 
• The key takeaway from this is that construction activity in Malaysia is highly expected to gain traction with construction GDP projected to grow 7% this year (Source: Economic Report 2011/2012 by Ministry of Finance Malaysia) vis--vis 3.5% in CY11, underpinned by pipeline government and private projects worth c.RM90bn to be implemented in CY12. Of this amount, RM24bn goes to government physical projects such as the c.RM20bn Klang Valley MRT Sungai Buloh-Kajang (SBK) line and RM32bn is for private financing initiative (PFI) and public-private partnership (PPP) projects, e.g. c.RM8bn Gemas-Johor Bahru electrified double-tracking project (EDTP) and West Coast Expressway (WCE) worth c.RM7bn. 
• The Government¡¯s Ministry of Finance (MoF) will finance the SBK MRT project by raising RM20bn - RM30bn of Ringgit-denominated Islamic bonds or sukuk in 3-4 months time, via its special purpose vehicle Dana Infra Sdn Bhd. To fund initial payment for construction work, MRT Co, a wholly-owned subsidiary of the MoF, will draw down on a RM400m- RM500m bridging loan from a consortium of banks.

IJM and WCT in the race for local contracts

• Besides the much anticipated Klang Valley MRT project, there is a backlog of other infrastructure and housing aid projects under the Greater KL/Klang Valley NKEA of the ETP, 10MP, Budget 2011 and Budget 2012 waiting to get off the ground, some of which overlap (e.g. the Second Rolling Plan of Budget 2012 rehashed the Gemas-JB EDTP and 6 highway projects (c.RM19bn) unveiled under 10MP). Our channel checks indicate that the Kuala Lumpur International Financial District (KLIFD) development with estimated GDV of RM26bn will start sometime in 2HCY12.
•  We remain optimistic that IJM will win a substantial portion of the WCE infrastructure works via its 22.7% stake in KEuro, the highway concessionaire. IJM¡¯s share of the works is expected to be about RM4bn, which we have already factored into our earnings model.
• We think that WCT has sufficient machinery and human resources to handle major projects like the Gemas - JB EDTP, where it plans to co-bid with one of the 3 shortlisted Chinese contractors. WCT can also leverage on its track record in civil engineering to secure sizable earthworks packages of the KLIFD project. WCT is also eyeing a subcontractor role to IJM in WCE, as they have done before in the Lebuhraya Kajang - Seremban highway project.

Maintain OVERWEIGHT

• We maintain our OVERWEIGHT call on Construction as trading sentiment on the sector has turned positive backed by the impending mega project awards likely to be front-loaded ahead of the 13th Malaysian General Elections sometime in CY12.
• Key risks to our view are: 1) project execution delays 2) rising building material prices.