RHB on Construction

♦ SCORE road projects to get off the ground? There has been
speculation that the Government will soon award out two key road
projects of the Sarawak Corridor of Renewable Energy (SCORE), namely:
(1) The Murum access road worth about RM900m; and (2) The Nanga
Merit access road worth about RM1.2bn.
♦ Bridging the gap. The award of the Murum access road project, if it
really happens soon, will bridge the gap between the award of the first
two large-scale local projects recently (in mid-2009), and the subsequent
ones (only from 2010 onwards), helping to sustain interest and the
current high valuations of construction stocks.
♦ “Liberalisation” of the construction market in East Malaysia? The
SCORE road projects will be awarded out on an open tender basis, with
no “special consideration” or exclusivity to be given to East Malaysiabased
contractors. This “liberalisation” that promotes competition and
brings down project costs is another tell-tale sign that low margins are
beginning to look like a new fact of life to local contractors.
♦ Risks to our views. These include: (1) New orderbooks secured by
construction companies exceed our assumptions; and (2) Steep falls in
commodity prices, boosting construction margins.
♦ Valuations have built in too much expectation, too little risks. On
the big picture, a more sustained flow of large-scale projects going
forward will help to replenish or even grow orderbooks of key construction
players, putting their earnings back on the growth path again. We
believe this is the expectation and it has already been built into share
prices of key construction stocks, based on their high valuations at
present. However, we believe this expected “happy ending” is still far
from being a foregone conclusion. We believe the market has underappreciated
(or chosen to conveniently ignore) two real key risks,
namely: (1) Delays in implementation; and (2) Sub-par margins due to
stiff competition. Maintain Underweight.