UOB Kay Hian Research maintains market weight on construction stocks

KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its market weight view of the construction stocks as valuations have passed their peaks.

It said on Wednesday this was inspite of the rich pipeline of mega construction jobs and robust orderbooks which would sustain earnings for the next two years.

“Sentiment would be dampened as the market would eventually price in a higher risk premium to reflection the election risk in the coming quarters,” it said in a research note.

UOB Kay Hian Research said the mass rapid transit (MRT) non-tunnelling packages were expected to stir newsflow.

“We expect at least three packages, namely V1, V2 and V7 of the KV MRT Sungai Buloh-Kajang (SBK) line, to be awarded by May 12 and each package is estimated to be worth about RM1 billion.

“Year-to-date, RM12 billion worth of jobs have been awarded and this has exceeded the total projects awarded in 2011 whereby the MRT tunnelling contract alone made up 68% of the total awarded contracts,” it said.

The research house said that the excitement over MRT 2 & 3 would only surface by end of 2012.

To recap, the MRT 2 & 3 lines were unveiled under the KL Transport Master Plan and were targeted for implementation in the second half of 2013.

MRT 2 would be 41km with 30 stations and MRT 3 would be 46km with 24 stations. Both lines are undergoing feasibility tests which include studies on alignment, station location and interchanges. The results were expected to be revealed by the second half of 2012.

UOB Kay Hian Research said it found smaller sized contractors such as Muhibbah (MUHIBAH) and Favelle Favco (FAVCO) decent.

Muhibbah had an outstanding orderbook of RM2.37 billion and traded at consensus 2012F PE of 7.0 time.

Also, Muhibbah's 55%-owned subsidiary Favelle Favco appeared fundamentally healthy and it was trading at only 5.0 times price-to-earnings even if based on the assumption of zero growth in 2012.

“This cash-rich subsidiary (cash represents about 24% of market capitalisation) supplies specialised cranes to the oil and gas industry and should have secured modest growth for the next few years,” said the research house.

[Source]