Sector Update Construction - Affin Hwang Capital in undertaking MRT civil work in Malaysia. ... Construction Sdn Bhd 339 ... Feb-16 Samalaju-2 Substation Establishment Project in Samalaju,

9 September 2016

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd)

Page 1 of 16

Earnings lag

Aggregate sector core net profit fell 14% yoy and 7% qoq in 2Q16 as

newly secured projects secured did not contribute significantly to

bottom lines. The construction companies saw strong new

infrastructure contract procurement in the first eight months of 2016

(8M16). We expect this to spur strong sector core earnings growth of

15% yoy in 2017E as most companies have record high order books.

We remain Overweight on the construction sector. Top market and

sector BUYs are WCT, Sunway Construction, Gamuda and AQRS.

Contract awards rebound in 1Q16, fall in 2Q16

According to Construction Industry Development Board (CIDB) statistics, the revised construction contract awards rebounded 7% yoy and 19% qoq to RM39.3bn in 1Q16. Contract awards fell 40% yoy and 56% qoq to RM17.2bn in 2Q16, but we believe this was due to reporting delays as new contract awards were high, according to news reports. All the work packages for the Pan-Borneo Highway (PBH) (Sarawak section) and SUKE/DASH expressways have been awarded. Most of the major work packages for the MRT Line 2 were also awarded. Based on news reports, we estimate about RM50bn of construction contracts were awarded in 8M16.

Value of new contract awards likely peaked in 2Q16

We expect the value of contract awards to ease in 4Q16 as most of the large-scale infrastructure projects have been launched. The remaining packages for the RM32bn MRT Line 2 and RM6bn West Coast Expressway (WCE) should be rolled out over the next 6-12 months. New projects expected in 4Q16 are the RM9bn LRT Line 3 and RM13bn Pan Borneo Highway (Sabah stretch) and most of the contract awards should flow through to 2017.

Lower earnings in 2Q16

Aggregate construction sector net profit contracted 44% yoy in 2Q16 as Eversendai, IJM Corp and WCT were hit by unrealised forex losses, while Eversendai incurred a RM102m impairment loss. Core net profit fell 14% yoy in 2Q16 as ongoing projects for most construction companies are at the tail-end while new contracts have not contributed significantly to earnings yet. The property arm of some of the companies such as IJM Corp saw lower earnings due to weaker sales and higher operating costs.

Maintain Overweight

We remain Overweight on the construction sector as news flow on contract awards should sustain sector outperformance. We see better value among small and mid-cap names such as Suncon, WCT and Gabungan AQRS. For large-cap exposure, we prefer Gamuda over IJM Corp, based on Gamuda’s higher ROE and order book/revenue ratio (better long-term earnings visibility). Key risks to our positive view on the sector are project execution risks and rising building material and labour costs.

Stock Bbg Rating Sh Pr TP Mkt cap Core PER (x) Core EPS gr (%) P/BV (x) ROE (%) DY (%)

(RM) (RM) (RMbn) CY16E CY17E CY16E CY17E CY16E CY16E CY16E

IJM Corp IJM MK BUY 3.45 3.76 12.4 22.3 19.7 3.5 13.3 1.2 5.9 2.9

Gamuda GAM MK BUY 4.83 5.70 11.7 20.3 17.8 (7.6) 14.1 1.7 10.0 2.5

MRCB MRC MK BUY 1.30 1.46 2.7 31.3 22.7 218.6 37.5 1.0 3.1 1.9

WCT Hldgs WCTHG MK BUY 1.62 2.00 2.0 19.4 13.6 52.0 42.2 0.8 4.5 3.7

Sunway Construction SCGB MK BUY 1.64 2.03 2.1 14.8 12.5 5.0 18.6 4.1 29.4 3.4

Eversendai EVSD MK BUY 0.47 0.67 0.4 5.6 4.9 9.2 14.6 0.4 6.5 1.1

Benalec BHB MK HOLD 0.44 0.53 0.3 15.3 10.6 83.8 44.9 0.6 4.1 3.4

Gabungan AQRS AQRS MK BUY 0.99 1.38 0.4 11.6 11.0 NA 4.8 1.1 12.3 0.0

Malaysian wgt avg 20.8 18.1 0.5 15.4 1.2 6.7 2.5 Source: Affin Hwang forecasts, Bloomberg. Note: Pricing as of close on 8 September 2016

Sector Update

Construction Overweight (maintain) Absolute Performance (%)

1M 3M 12M Eversendai 1.1 -21.7 -37.3 Benelac -9.4 -9.4 -23.0 GAQRS -12.8 3.1 11.3 Gamuda -1.4 -1.4 9.8 IJM Corp 1.2 0.3 16.0 MRCB 3.2 17.1 30.0 WCT 5.2 3.8 33.0 Suncon -0.6 5.8 50.5

Relative Performance (%)

Source: Affin, Bloomberg.

Loong Chee Wei CFA (603) 2146 7548

[email protected]

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IJM

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9 September 2016

Affin Hwang Investment Bank Bhd (14389-U)

Page 2 of 16

Contract awards rebound in 1Q16, fall in 2Q16

Revised contract awards figure shows rebound in 1Q16

The revised construction contract awards figure of RM39.3bn in 1Q16 (previous

reported figure was RM11.9bn) showed a 7% yoy and 19% qoq increase. The

roll out of the RM32bn MRT Line 2 and RM16bn PBH (Sarawak section)

projects spurred the rebound in contract awards. Although contract awards fell

40% yoy and 56% qoq to RM17.2bn in 2Q16, the sharp decline could be

due to reporting delays as new contract awards were high as reported in the

news.

Fig 1: Quarterly contract awards by government and private sector

Source: Construction Industry Development Board

RM50bn of contract awards in 8M16

Based on news reports, we estimate about RM50bn worth of construction

contracts were awarded in 8M16. All the work packages for the RM16bn

PBH (Sarawak section) and RM5.1bn Sungai Besi-Ulu Kelang Expressway

(SUKE) and RM3.3bn Damansara-Shah Alam Highway (DASH) have been

awarded.

SUKE/DASH expressways launched

Surprisingly, most of the contracts for SUKE (RM/DASH were awarded to

relatively small unlisted contractors. JAKS Resources (BUY), Protasco (Not

rated) and Zelan (Not rated) were the only listed companies that won civil

work packages for SUKE/DASH. Gabungan AQRS secured a RM508m

subcontract from Syarikat Muhibbah Perniagaan & Pembinaan Sdn Bhd

(SMPP), which clinched the largest package worth RM1.05bn.

Large MRT Line 2 packages awarded

Most of the major work packages for the MRT Line 2 worth RM23.9bn out

of the estimated RM32bn in total were awarded in 8M16. Three above-

ground packages were awarded to incumbents, ie, Suncon, Ahmad Zaki

Resources (Not rated), IJM Corp (BUY), which undertook work on MRT Line

1. Malaysian Resources Corp (BUY) and the China Communications

Construction Company-George Kent (Not rated) joint venture (JV) are new

names in undertaking MRT civil work in Malaysia.

It is surprising that a Chinese-led JV was awarded a package, indicating

rising foreign competition for local infrastructure projects. The largest

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9 September 2016


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contract awarded for MRT Line 2 was the RM15.5bn underground work

package awarded to the JV between MMC Corp and Gamuda. We believe most

of the remaining RM8bn worth of contracts for the MRT2 should be awarded by

1H17.

Fig 2: Major construction projects awarded year to date Award date Project Contractor Value

(RMm)

Klang Valley Mass Rapid Transit Line 2 (Sg Buloh-Serdang-Putrajaya Line)

Apr-16 KVMRT Line 2 Package V201 (Sg Buloh-Persiaran Dagang) Sunway Construction 1,213

Mar-16 KVMRT Line 2 Package V202 (Persiaran Dagang-Jinjang) Ahmad Zaki 1,440

May-16 KVMRT Line 2 Package SY203 (electric trains and depot equipment) HAP Consortium 1,620

Mar-16 KVMRT Line 2 Package SBG201 (box girders for V201-V205) SPC Industries Sdn Bhd 199

Mar-16 KVMRT Line 2 Package SBG202 (box girders for V206-V210) Acre Works Sdn Bhd 170

Mar-16 KVMRT Line 2 Underground Work Package MMC-Gamuda 15,470

May-16 KVMRT Line 2 Package SY201 (signal and train control system) Bombardier-Global Rail 458

May-16 KVMRT Line 2 Package V210 (Persiaran APEC-Putrajaya Sentral) MRCB 648

May-16 KVMRT Line 2 Package V203 (Jinjang-Jln Ipoh) IJM Corp 1,470

May-16 Package DPT 203: Serdang depot TSR Capital 90

Aug-16 KVMRT Line 2 Package SSP-SY-204 (System Work Package) George Kent - CCCC (49:51) 1,007

Aug-16 KVMRT Line 2 Package V202 (Relocation of telecommunication works) UEM Edgenta 87

Sub-total 23,872

Pan-Borneo Highway, Sarawak

Mar-16 PBH Phase 1: Serian Roundabout-Pantu Junction Kimlun-Zecon 1,461

Mar-16 PBH Phase 1: Bintangor-Julau-Sibu Airport-Sg Kua Bridge (Batang Rajang Bridge)

Hock Seng Lee-Dhaya Maju Infra

1,710

Jul-16 PBH Phase 1: Works Package Contract WPC-04: Pantu Junction to Btg Skrang

Gamuda-Naim Engineering (30:70)

1,567

Jul-16 PBH Phase 1: Works Package Contract: Sg. Kua Bridge to Sg. Arip Bridge Mudajaya-Musyati Sdn Bhd (30:70)

1,326

Jul-16 PBH Phase 1: Works Package Contract WPC-06: Sg. Awik Bridge to Bintangor Junction

Bina Puri-PPES Works Sarawak(30:70)

1,359

Aug-16 PBH Phase 1: Works Package Contract WPC-09 : Sungai Arip Bridge to Bintulu Airport Junction

WCT-KKB Engineering (30:70)

1,300

Sub-total 8,723

Sungai Besi-Ulu Kelang Expressway (SUKE)

Aug-16 CH.16700 to CH.19400: Contract no: CB3 Jaks Resources 509

Aug-16 CH.15000 to CH.16700: Contract no: Turnpike-SUKE-C-B-ML-CB2-012) Zelan Berhad 258

Aug-16 Contract no: CA2 Protasco Berhad (HCM Engineering) -Hatimuda Sdn Bhd (40:60)

316

Aug-16 Contract no: CA1 Cengal Jati Sdn Bhd 418

Aug-16 Contract no: CA3 Syarikat Muhibah Perniagaan dan Pembinaan Sdn Bhd

1,053

Aug-16 Contract no: CA4 ML Sepakat-China Harbour Engineering Co

940

Aug-16 Contract no: CB1 Cergas Murni Sdn Bhd 550

Aug-16 Contract no: CB4 Cantilever Bumi Sdn Bhd 353

Aug-16 Contract no: CB5 Bridgex - BBSB 240

Sub-total 4,636

Damansara-Shah Alam Highway (DASH)

Jul-16 Contract no: CA1 Usahasama Monza- Latimer 320

Jul-16 Contract no: CA2 Perkasa Jauhari Sdn Bhd 189

Jul-16 Contract no: CA3 Johawaki Sdn Bhd 414

Jul-16 Contract no: CA4 Panzana Enterprise Sdn Bhd 670

Jul-16 Contract no: CB1 Acre Works Sdn Bhd 454

9 September 2016


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Jul-16 Contract no: CB2 System Engineering Construction Sdn Bhd

339

Jul-16 Contract no: CB3 HRA Teguh Sdn Bhd 391

Jul-16 Contract no: CB4 Pertama Makmur-China Harbour Engineering Co

476

Sub-total 3,252

Other projects

Feb-16 New Sewerage Treatment Plant, Danga Bay Johor Progressive Impact Corp 44

Feb-16 PPA1M houses at Precint 17, Putrajaya Mitrajaya Holding 157

Feb-16 Mixed development complex building and external works, Section 13 PJ Mitrajaya Holding 293

Feb-16 Extension of 11-storey office building at Kota Kinabalu (Sabah Petronas Carigali)

Muhibah Engineering 137

Feb-16 Construction of a condominium Pesona Metro Holding 181

Feb-16 Samalaju-2 Substation Establishment Project in Samalaju, Bintulu Hock Seng Lee-Larsen & Tourbro

281

Mar-16 4 Storey Temporary Sales Office, Jln Hang Tuah/Jln Pudu Zelan Bhd 38

Mar-16 Kuching City Central Wastewater Mgmt Syste Package 2 Hock Seng Lee 750

Mar-16 Work of Civil and Underground Piping in RAPID project package 2 (subcon) Ho Hup Construction 58

Mar-16 Construction of a service apartment block in Persiaran Stonor, KL Ikhmas Jaya 174

Mar-16 KVMRT SBK Line (MRT feeder buse depot at Kajang) Potensi Cekal Sdn Bhd 63

Mar-16 KVMRT SBK Line (Pasar Seni LRT link) TRC Synergy 104

Mar-16 Bored piling and basement work for a hotel in Penang Econpile Holdings 52

Apr-16 Substructure woks for a commercial development in Sg Buloh Econpile Holdings 55

Apr-16 Upgrading of Phnom Penh Airport in Cambodia Muhibbah Engineering-VCGP 88

Apr-16 Renovation works in 7 schools in Sarawak Iris Corp. Bhd 29

Apr-16 492 units of houses in Plentong, Johor Bahru Kimlun 98

May-16 Selangorku affordable apartments, Mukim Petaling Kimlun 166

May-16 Rehabilitation of Jerantut-Gua Musang railway station Fajarbaru Builder Group 260

May-16 Affordable Housing Development (Batu Berendam, Phase 3) Flonic Hi-Tec 30

May-16 Elysia Park Residence-Phase 1 Kerjaya Prospek 313

May-16 PETRONAS Refinery and Petrochemical Intergrated Development Project (RAPID)

Barakah Offshore 84

May-16 Road, Drainage, Culvert and Duct Bank Works Package at Rapid Project Mitrajaya Holding 52

Jun-16 Oxley Rising Sdn Bhd - mixed commercial building at Lot 99 Jln Ampang Econpile Holdings 208

Jun-16 Piping Erection Subcontract Package WZ Satu 19

Jun-16 Lebuhraya Persisiran Pantai Barat: FT005 Teluk Intan- Kg, Lekir, Perak Darul Ridzuan

WZ Satu Berhad 43

Jun-16 Mixed development project at PT9344 Setapak Crest Builder 438

Jun-16 Execution of pipe sleeper and underground services for Package-22 RAPID project

Bina Puri 73

Jun-16 Bridge Building across Sungai Kuantan connecting Kuantan ton to Putra Town, Tanjung Lumpur, Pahang

Ahmad Zaki Resources 152

Jun-16 Zecon Medicare Pediatric Hospital (Supply, delivery, installation, testing & commissioning, training, maintainence and warranty for HT & LV and Air Conditioning & Mechanical Ventilation System

SunCon 66

Jun-16 Supply of MSCL Pipers & Specials for the Proposed Project Bekalan Air Luar Bandar Negeri Sarawak

KKB Engineering 11.4

Jul-16 The Apple Project (mixed development) Kerjaya Prospek Group Berhad

214

Jul-16 Scope of Coating Work for the Johan Sverdup Export Pipeline Project Wah Seong Corporation 74

Jul-16 Cyberjaya Education Hub Phase 1 (Subcon) AWC Berhad 13

Jul-16 Mixed development project in lot 80418 (Plot 3) Persiaran Dutamas from Nusmetro Property Sdn Bhd

Kerjaya Prospek Group Berhad

389

Aug-16 Program Perumahan Rakyat in Pitas, Sabah Bina Puri 80

Aug-16 PR1MA @Sri Gading at Alor Gajah, Melaka O&C Resources Berhad 101

Aug-16 Subcontractor to Schneider Electric France SAS: Design and build up of 7 pre-fabricated area sub-stations for a project in Kazakhstan

Wah Seong Corporation 167

9 September 2016


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Aug-16 Setiawangsa - Pantai Expressway (formerly known as DUKE Phase-3): Design, construction, completion, operation, management and maintenance

Ekovest 3,900

Aug-16 Malaysia-China Kuantan Industrial Park (MCKIP) CH.2400 to CH.4630: Main access road and primary infrastructure and utilities

Fajarbaru Builder Group 21

Aug-16 West Coast Expressway (Alignment) IJMC - KEB 41

Aug-16 Construction and completion of Part of Civil Works for Section 10- Changkat Cermin to Berus Interchange for Lebuhraya Pesisiran Pantai Barat (Taiping- Banting)

WZ satu Berhad 71

Aug-16 Main building works for the proposed development of International School or Kuala Lumpur in Jalan Ampang Hilir

SunCon 268

Aug-16 Rehabilitation of Jerantut-Gua Musang railway station (Independent Checking Consultant)

HSS Intergrated Sdn Bhd 14

Sep-16 Building works for Eco Terraces condominium in Northeast District, Penang Island

Kerjaya Prospek Group Berhad

147

Sub-total 10,014

Total 50,497

Source: The Star, NST, Malay Mail, The Sun, The Edge, Affin Hwang, companies

9 September 2016


Page 6 of 16

Value of new contracts likely peaked in 2Q16

RM40bn worth of contracts to be awarded

We estimate about RM40bn worth of contracts will be awarded over the next 6-

12 months. We believe the launch of the RM12.8bn PBH (Sabah section),

RM9bn LRT Line 3 and RM8bn Southern Double-tracking Rail will potentially

support construction order book replenishment for the construction companies

indicated below. We believe contract awards have peaked in 2Q16 given the

record high value of the contracts awarded, including the underground contract

for the MRT Line 2. This year could turn out to be a new record year for contract

awards.

Fig 3: Contract awards expected over the next 6-12 months

Project Cost (RMbn) Potential listed co bidders

Klang Valley MRT Line 2 (Sg Buloh-Selayang-Putrajaya) 8.1 Gadang, Mudajaya, GAQRS, WCT

Pan-Borneo Highway (Sabah section) 12.8 WCT, Suria Capital-GAQRS

LRT Line 3 (Bandar Utama-Shah Alam-Klang) 9.0 Suncon, IJM, Gamuda, Gadang, TRC

Southern Double-tracking Rail 8.0 Gamuda, IJM, WCT, Fajar Baru

West Coast Expressway 2.1 IJM, WCT, WZ Satu

Total 40.0 Source: The Star, NST, Malay Mail, The Sun, The Edge, Affin Hwang

Fig 4: Annual contract awards by government and private sector

Source: Construction Industry Development Board

Record order book for construction companies

The large listed construction companies under our coverage, ie, Gamuda, IJM

Corp, Malaysian Resources Corp (MRCB) and WCT, have record order books

after securing major contracts in 2016. Including the PDP and underground

work for MRT2 and recent PBH (Sarawak section) package, Gamuda has the

highest order book at RM18.3bn in the sector. MRCB have the second largest

order book at about RM8.5bn.

9 September 2016


Page 7 of 16

Fig 5: Construction order book of companies under coverage

Source: Company, Affin Hwang estimates

Good earnings visibility

MRCB, Gamuda and IJM have the best earnings visibility in our view, as their

outstanding order book is more than 4x their historical annual construction

revenue. We believe the potential new contracts to be secured this year by

Suncon and WCT (our top sector picks) will grow their order book and improve

earnings visibility to narrow the gap with peers such as IJM and MRCB. The

recent contract win by Gabungan AQRS has also improved the earnings

visibility with an order book/annual revenue ratio to 3.7x from 2x in 1Q16.

Fig 6: Construction order book / Annual revenue ratio of selected companies

Source: Company, Affin Hwang estimates

9 September 2016


Page 8 of 16

Core earnings rebounded qoq in 2Q16

2Q16 results were generally below expectations

The construction companies reported 2Q16 result that were below our

expectations. The 43% yoy decline in aggregated net profit was mainly due

to lower asset disposal gains for IJM Corp and MRCB or impairment loss

for an associate company in the case of Eversendai. WCT and Eversendai

also incurred higher unrealised forex losses. But aggregate net profit

jumped 79% qoq in 2Q16 as earnings for IJM Corp, MRCB and WCT

rebounded from a low base in 1Q16.

Core net profit fell 14% yoy and 7% qoq as construction earnings continued

to lag. Existing construction projects were mostly near the tail end while new

projects secured have not contributed significantly to earnings. Property

earnings were also weak due to slower property sales as the demand

outlook remained cautious.

Fig 7: Aggregate construction net profit and yoy change

Source: Companies

Fig 8: Aggregate construction core net profit and yoy change

Source: Companies

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9 September 2016


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Order book expansion and improving profit margins

Most construction companies saw order-book expansion to new highs with the

award of contracts for the MRT2 project (IJM Corp, MRCB, Sunway

Construction and Gamuda benefited). However, while the new projects have

not contributed significantly to bottom line in 1Q16, they should start contributing

in subsequent quarters. Construction pre-tax profit (PBT) margins were

generally weaker for the companies under our coverage partly due to higher

steel prices in the quarter. But we gather that steel prices have eased from a

peak of RM2,800/t in 2Q16 to RM1,900/t currently.

Fig 9: Construction PBT margins (%)

Year to 31 Dec 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

Benalec (12.6) 20.5 11.8 14.9 3.2 12.0

Eversendai 5.3 3.6 4.0 2.6 (10.6) (4.4)

Gabungan AQRS 3.5 1.4 (52.4) 13.8 (4.2) (0.3)

Gamuda 9.4 9.1 5.2 6.0 8.2 7.5

IJM 28.5 19.0 11.6 7.2 15.0 10.1

MRCB 1.6 12.2 21.2 (24.6) 0.7 1.0

Sunway Construction 4.2 6.3 2.4 2.2 7.0 5.9

WCT 11.0 11.9 37.9 (4.2) 1.0 5.9 Source: Companies

9 September 2016


Page 10 of 16

Maintain Overweight

Top BUYs are Suncon, WCT, Gamuda and AQRS

We reiterate our Overweight stance on the Malaysian construction sector as we

believe the sector’s core EPS growth of 15% YoY in 2017E will outpace the

market average of 8% YoY. The weighted average construction sector fully

diluted core 2016E PER of 20x is above the market average of 18x. We look for

news flow on the awards of major infrastructure projects in 2H16 to sustain the

upward re-rating of the construction stocks. Our top BUYs are Suncon, WCT,

Gabungan AQRS and Gamuda.

Fig 10: Valuations and core EPS growth for the Malaysian sectors and market

Core EPS Growth (%) Core PE (x) Yield (%) P/BV (x) ROE (%)

Sector Rating 2016E 2017E 2016E 2017E 2016E 2016E 2016E

Banks & Financial Services OW 3.0 9.5 13.4 12.4 3.8 1.5 10.1

Auto & Autoparts N 92.9 48.1 26.7 17.1 2.7 1.1 3.5

Building Materials N 28.2 2.2 23.4 23.0 4.0 2.3 9.1

Construction & Infrastructure OW (11.2) 18.1 20.1 17.3 2.8 1.3 6.9

Consumer N (6.7) 16.3 23.0 21.6 4.3 17.3 21.6

Gaming OW 14.3 10.0 16.3 14.8 1.1 0.6 4.5

Healthcare & Pharma. OW 30.0 15.8 47.6 41.1 0.6 2.4 5.1

Media N (2.5) 10.9 19.2 17.0 5.0 5.4 20.7

MREIT OW 103.7 4.4 16.6 16.3 5.5 1.1 6.8

Oil & Gas UW (25.4) 4.3 24.5 24.2 2.1 1.9 4.9

Plantation N 30.0 28.9 24.0 18.5 2.7 2.2 9.1

Property OW (1.6) 8.0 10.8 10.1 4.1 0.9 7.8

Rubber Products N 7.6 9.6 28.5 26.0 1.6 5.0 16.5

Technology OW 0.1 3.0 17.0 17.1 2.6 2.8 17.1

Telecoms N (1.0) 7.8 27.6 25.6 3.1 4.8 18.0

Timber OW (14.7) 16.2 16.8 14.9 3.0 1.1 5.2

Transports & Logistics N 28.9 (2.0) 19.4 19.7 1.1 1.1 8.8

Utilities OW 7.4 2.5 14.4 14.2 2.6 1.9 10.5

Coverage (0.1) 7.5 18.2 16.9 3.1 2.1 9.1 Source: Affin Hwang estimates, based on prices as of 8 September 2016

9 September 2016


Page 11 of 16

Fig 11: Valuations for Malaysian construction companies

Stock Bbg Rating Sh Pr TP Mkt cap Core PER (x) Core EPS gr (%) P/BV (x) ROE (%) DY (%)

(RM) (RM) (RMbn) CY16E CY17E CY16E CY17E CY16E CY16E CY16E

IJM Corp IJM MK BUY 3.45 3.76 12.4 22.3 19.7 3.5 13.3 1.2 5.9 2.9

Gamuda GAM MK BUY 4.83 5.70 11.7 20.3 17.8 (7.6) 14.1 1.7 10.0 2.5

MRCB MRC MK BUY 1.30 1.46 2.7 31.3 22.7 218.6 37.5 1.0 3.1 1.9

WCT Hldgs WCTHG MK BUY 1.62 2.00 2.0 19.4 13.6 52.0 42.2 0.8 4.5 3.7

Sunway Construction SCGB MK BUY 1.64 2.03 2.1 14.8 12.5 5.0 18.6 4.1 29.4 3.4

Eversendai EVSD MK BUY 0.47 0.67 0.4 5.6 4.9 9.2 14.6 0.4 6.5 1.1

Benalec BHB MK HOLD 0.44 0.53 0.3 15.3 10.6 83.8 44.9 0.6 4.1 3.4

Gabungan AQRS AQRS MK BUY 0.99 1.38 0.4 11.6 11.0 NA 4.8 1.1 12.3 0.0

Malaysian wgt avg 20.8 18.1 0.5 15.4 1.2 6.7 2.5 Source: Affin Hwang estimates, Bloomberg, based on prices as of 8 September 2016

Fig 12: Malaysian construction sector and market top BUYs

Top BUY Rating Analysts’ Comments

GAMUDA (GAM MK)

Target Price : RM5.70 Share Price as at 8 Sep 2016

: RM4.83

BUY Gamuda is our top BUY among the large-cap Malaysian construction stocks with a fully-diluted RNAV-based 12-month target price of RM5.70. Gamuda and its partners have been appointed as the project delivery partner for the RM30bn Klang Valley Mass Rapid Transit Line 2 (MRT2) and RM27bn Penang Transport Master Plan (PTMP). MMC Gamuda Joint Venture was also awarded the RM15.47bn underground works contract for MRT2. Naim-Gamuda JV also clinched the RM1.57bn Pan-Borneo Highway (Sarawak) package. The three projects should spur long-term earnings growth of its construction division. The potential sale of its 40% stake in the Splash water supply concession would provide the funding for its PTMP project. Key risks are MRT2 project execution risks and slow property sales.

Sunway Construction (SCGB MK)


: RM1.64

BUY SCGB is among our top BUYs for mid-cap construction stocks with an RM2.03 target price, based on a 10% discount to its RNAV. We believe its prospects to win new infrastructure projects are good as a pre-qualified contractor for LRT Line 3 and commercial building projects to be rolled out this year. We think SCGB provides pure construction exposure to the cyclical upturn for the sector. Its precast concrete division benefits from the weak Ringgit as it derives revenue in SGD. We also believe that its strong net cash position will support a high dividend payout and attractive net yield of over 3% in FY16E. Key risks are higher building material costs and rising competition for new contracts.

3.50

3.70

3.90

4.10

4.30

4.50

4.70

4.90

5.10

5.30

Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

(RM)

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16

(RM)

9 September 2016


Page 12 of 16

Top BUY Rating Analysts’ Comments

WCT (WCTHG MK)


: RM1.62

BUY WCT is one of our top BUYs among the mid-cap construction stocks with a 12-month target price of RM2.00, based on a 10% discount to its RNAV. WCT has replenished its order book with RM4.3bn outstanding work, improving earnings visibility. We believe WCT’s prospects to secure more local contracts have improved after it was pre-qualified to bid for the MRT2, LRT3 and WCE projects. The potential construction and shopping mall REIT listings in 1H17 should unlock values and reduce its gearing. We expect strong 3-year core EPS CAGR of 48% in FY16-18E. Key risks are further delays in its de-gearing plans and slow property sales.

Gabungan AQRS (AQRS MK)


: RM0.99

BUY Gabungan AQRS (GAQRS) is our top BUY among the small-cap Malaysian construction stocks with a RM1.38 target price, based on 10% discount to RNAV. GAQRS secured RM1.25bn new projects YTD2016, ie, the Bukit Gambang and Dengkil PR1MA housing, and Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) projects. This is equivalent to 4.6x FY15 revenue, improving earnings visibility. Good prospects to grow its order book with its potential involvement in the development of Kota SAS, including a potential RM320m contract for the new Pahang administration centre. Its One Jesselton Waterfront mixed development project with net sales value of RM1.8bn will be a game changer for its property development operations when it kicks off in 2017. Key risks are project execution risks given a sharp increase in order book and further delays in obtaining authority approvals to kick start its One Jesselton project.

Source: Bloomberg, Affin Hwang

KLCON outperforms FBMKLCI

The KL Construction (KLCON) Index has outperformed the FBMKLCI by 6%

over the last two years due to positive news flow on new contract awards. The

current 12-month forward PER of 14.8x for the KLCON Index is above the long-

term mean PER of 13.4x. But the current Price/Book of 1.3x is below the long-

term mean Price/Book of 1.36x.

Fig 13: KL Construction Index vs FBMKLCI Index performance

Source: Bloomberg

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

(RM)

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16

(RM)

75

80

85

90

95

100

105

110

Jul-

14

Se

p-1

4

No

v-1

4

Jan

-15

Mar-

15

Ma

y-1

5

Jul-

15

Se

p-1

5

No

v-1

5

Jan

-16

Ma

r-1

6

Ma

y-1

6

Jul-

16

Se

p-1

6

KLCON Index FBMKLCI Index

9 September 2016


Page 13 of 16

Fig 14: Construction stocks relative performance to FBMKLCI year to date

Source: Bloomberg

Fig 15: KL Construction Index 12-month forward PER

Source: Bloomberg

0 20 40 60 80 100 120

Eversendai

Benalec

Gabungan AQRS

Gamuda

IJM

MRCB

WCT

Sunway Construction

Mean PE, 13.4

+1SD PE, 15.0

-1SD PE, 11.7

6

8

10

12

14

16

18

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

(x)(x)(x)(x)

Latest PE. 14.8

9 September 2016


Page 14 of 16

Fig 16: KL Construction Index 12-month forward Price/Book

Source: Bloomberg

Examining the 12-month PER trading bands for the Malaysian construction

stocks, we find that valuations are either close to the historical mean or at a

discount. Given the short trading history for Suncon, which was listed in 4Q15,

we examine its trading bands before the de-listing of the stock in 2006 and find

that the current PER of 14.8x (ex-cash PER of 12.2x) is below the historical

mean of 15.8x. In the current upcycle for the construction sector underpinned

by the rollout of major infrastructure projects, we believe current PER valuations

are undemanding. We believe this provides fundamental support for the

outperformance of the stocks on expected positive news flow.

Key risks to our Overweight view on the construction sector is higher building

material costs that will erode profit margins and project execution risks.

Latest PB 1.30

Mean PB, 1.36

+1SD PB, 1.50

-1SD PB, 1.21

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

(x)

9 September 2016


Page 15 of 16

Fig 17: Gamuda 12-month forward PER

Source: Bloomberg, Affin Hwang forecasts

Fig 18: IJM Corp 12-month forward PER


Fig 19: WCT Holdings 12-month forward PER


Fig 20: Suncon 12-month forward PER


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

+1SD PE: 21.6

-1SD PE: 11.7

Avg: 16.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

199

5

199

6

199

7

199

8

199

9

200

0

2001

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

+1SD PE: 19.7

-1SD PE: 10.9

Avg: 15.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

+1SD PE: 18.2

-1SD PE: 4.4

Avg: 11.3

9 September 2016


Page 16 of 16

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a

recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Bhd 27th Floor, Manara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia www.affinhwang.com Email : [email protected] Tel : + 603 2146 7599 Fax : + 603 2146 7630

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