14 February 2020 Affin Hwang Investment Bank Bhd (14389-U) Page 1 of 9 Focus on execution The Malaysian government is drawing up an economic stimulus package to counter the negative impact of the Covid-19 coronavirus outbreak on the domestic economy. We believe government spending will likely focus on helping the SME, manufacturing and tourism sectors affected by the outbreak. The government will likely accelerate the implementation of construction projects in 2H20 to support economic growth in view of external headwinds. We remain OVERWEIGHT the Construction Sector. Top BUYs are Gamuda, SunCon, AQRS and HSS. Stimulus unlikely to focus on construction projects The Ministry of Finance is getting feedback from various industries to determine the impact of the novel Covid-19 coronavirus outbreak on the domestic economy before initiating an economic stimulus package to boost growth. We believe the package will likely focus on helping the SME, manufacturing and tourism sectors that are most affected by the outbreak. The RM7.3bn economic stimulus announced in May 2003 to mitigate the adverse impact of the Severe Acute Respiratory Syndrome (SARS) outbreak focused on supporting private consumption, assisting SMEs and tourism-linked businesses. We believe there is limited scope to increase construction spending given the government’s fiscal deficit constraint. Infrastructure spending to accelerate Nevertheless, the increase in development expenditure allocation by 4% yoy to RM56bn in Budget 2020 and the revival of large-scale infrastructure projects are sufficient to stimulate the construction sector. We expect government development spending to accelerate in 2H20 instead of 1H20 as there have been delays in the award of public-sector contracts. The award of East Coast Rail Link (ECRL) works to Malaysian contractors has been delayed. We believe the government will accelerate infrastructure spending in 2020 to support economic growth, similar to prior years with economic stimulus packages to mitigate downturns in 2001, 2003, 2008 and 2009. Large-scale infrastructure projects to be revived The Johor Bus Rapid Transit (BRT), Rail Transit System (RTS) and Pan Borneo Highway Sabah projects will likely kick off this year. Other large- scale projects such as the Klang Valley MRT Line 3 (MRT3), Penang Transport Master Plan (PTMP) and KL-Singapore High Speed Rail (HSR) could see news flow on potential revival in 2020. Remain Overweight the Construction Sector We believe the positive news flow on the resumption in government infrastructure spending and stronger 4Q19 and 2020E sector core earnings growth will support an upward re-rating of the Construction Sector. We maintain our OVERWEIGHT call. Top BUYs are Gamuda, SunCon, AQRS and HSS. Other sector BUYs are AME Elite Consortium, Pintaras Jaya and Taliworks. Construction peer comparison Source: Bloomberg, Affin Hwang forecasts Note: Pricing as of close on 13 February 2020 Share Pr TP Mkt Cap RNAV/ Sh Pr discount (RM) (RM) (RMbn) CY19E CY20E CY19E CY20E CY19E CY19E CY19E CY19E share to RNAV GAMUDA GAM MK BUY 4.05 4.30 10.1 15.7 15.8 (8.3) (7.6) 12.6 1.3 8.4 3.0 4.34 7 0 IJM CORP IJM MK HOLD 2.29 2.20 8.3 23.3 21.7 (6.7) 7.4 11.9 0.8 3.2 2.4 2.75 17 0 MRCB MRC MK SELL 0.69 0.58 3.0 (82.6) 80.3 (175.3) (202.9) 113.7 0.6 (0.8) 2.5 0.97 29 40 WCT WCTHG MK HOLD 0.76 0.96 1.1 12.8 9.8 (17.7) 26.7 14.8 0.3 2.5 2.3 1.92 61 50 SUNWAY CONSTRUCTION SCGB MK BUY 2.00 2.25 2.6 19.8 15.9 (13.7) 25.0 11.1 4.1 20.5 3.5 2.50 20 10 AME ELITE AME MK BUY 1.93 2.28 0.8 15.6 12.9 53.4 20.8 9.6 1.4 9.2 1.2 3.24 40 30 GABUNGAN AQRS AQRS MK BUY 1.11 1.62 0.5 10.9 7.9 (31.8) 39.1 8.3 1.8 9.5 3.6 2.02 45 30 PINTARAS PINT MK BUY 2.96 4.04 0.5 10.3 8.7 84.5 18.0 4.9 1.5 14.6 6.8 NA NA NA TALIWORKS TWK MK BUY 0.86 1.18 1.7 28.7 20.9 70.4 37.6 10.6 1.6 5.7 6.3 1.30 34 10 HSS ENGINEERING HSS MK BUY 0.82 1.18 0.4 101.2 17.8 (81.9) 467.7 22.4 1.9 1.8 0.0 NA NA NA Average 29.1 20.2 17.9 (11.4) 12.8 13.2 1.5 5.1 3.1 2.4 32 21 Avg ex Gamuda, MRCB, IJM 7.6 17.8 13.5 (2.9) 31.6 11.7 1.8 6.5 3.4 Company Name Ticker Rating TP Discount to RNAV Div Yield (%) Core EPS growth (%) ROE (%) Core PE (x) EV/EBITDA (x) P/BV (x) Sector Update Construction OVERWEIGHT (maintain) Absolute Performance (%) 1M 3M 12M AQRS (4.3) (11.2) 9.9 Gamuda 1.5 7.7 47.3 HSS Eng 1.2 (1.8) (18.5) IJM Corp 2.7 7.0 25.1 MRCB (6.8) (10.4) (5.5) Pintaras (4.5) (10.3) 28.7 SunCon 10.5 1.5 27.4 WCT (8.5) (15.6) (4.9) AME 3.8 9.0 N/A Taliworks 10.5 1.5 27.4 Relative Performance to KLCI – Gamuda, SunCon, AQRS, HSS (%) Source: Affin Hwang, Bloomberg Loong Chee Wei, CFA (603) 2146 7548 [email protected]60.0 80.0 100.0 120.0 140.0 160.0 180.0 Jan 19 Jan 19 Feb 19 Feb 19 Mar 19 Mar 19 Apr 19 Apr 19 Apr 19 May 19 May 19 Jun 19 Jun 19 Jul 19 Jul 19 Aug 19 Aug 19 Sep 19 Sep 19 Oct 19 Oct 19 Oct 19 Nov 19 Nov 19 Dec 19 Dec 19 Jan 20 Jan 20 Feb 20 GAMUDA HSS AQRS SUNWAY CONSTRUCTION
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Affin Hwang 20200114 Construction SU · 14 February 2020 Affin Hwang Investment Bank Bhd (14389-U) Page 1 of 9 Focus on execution The Malaysian government is drawing up an economic
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Transcript
14 February 2020
Affin Hwang Investment Bank Bhd (14389-U)
Page 1 of 9
Focus on execution
The Malaysian government is drawing up an economic stimulus package
to counter the negative impact of the Covid-19 coronavirus outbreak on
the domestic economy. We believe government spending will likely focus
on helping the SME, manufacturing and tourism sectors affected by the
outbreak. The government will likely accelerate the implementation of
construction projects in 2H20 to support economic growth in view of
external headwinds. We remain OVERWEIGHT the Construction Sector.
Top BUYs are Gamuda, SunCon, AQRS and HSS.
Stimulus unlikely to focus on construction projects
The Ministry of Finance is getting feedback from various industries to
determine the impact of the novel Covid-19 coronavirus outbreak on the
domestic economy before initiating an economic stimulus package to boost
growth. We believe the package will likely focus on helping the SME,
manufacturing and tourism sectors that are most affected by the outbreak.
The RM7.3bn economic stimulus announced in May 2003 to mitigate the
adverse impact of the Severe Acute Respiratory Syndrome (SARS)
outbreak focused on supporting private consumption, assisting SMEs and
tourism-linked businesses. We believe there is limited scope to increase
construction spending given the government’s fiscal deficit constraint.
Infrastructure spending to accelerate
Nevertheless, the increase in development expenditure allocation by 4% yoy to
RM56bn in Budget 2020 and the revival of large-scale infrastructure projects
are sufficient to stimulate the construction sector. We expect government
development spending to accelerate in 2H20 instead of 1H20 as there have
been delays in the award of public-sector contracts. The award of East Coast
Rail Link (ECRL) works to Malaysian contractors has been delayed. We
believe the government will accelerate infrastructure spending in 2020 to
support economic growth, similar to prior years with economic stimulus
packages to mitigate downturns in 2001, 2003, 2008 and 2009.
Large-scale infrastructure projects to be revived
The Johor Bus Rapid Transit (BRT), Rail Transit System (RTS) and Pan
Borneo Highway Sabah projects will likely kick off this year. Other large-
scale projects such as the Klang Valley MRT Line 3 (MRT3), Penang
Transport Master Plan (PTMP) and KL-Singapore High Speed Rail (HSR)
could see news flow on potential revival in 2020.
Remain Overweight the Construction Sector
We believe the positive news flow on the resumption in government
infrastructure spending and stronger 4Q19 and 2020E sector core earnings
growth will support an upward re-rating of the Construction Sector. We
maintain our OVERWEIGHT call. Top BUYs are Gamuda, SunCon, AQRS
and HSS. Other sector BUYs are AME Elite Consortium, Pintaras Jaya and
Taliworks.
Construction peer comparison
Source: Bloomberg, Affin Hwang forecasts Note: Pricing as of close on 13 February 2020
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) (“the Company”) based on sources believed to be reliable and is not to be taken in substitution for the exercise of your judgment. Such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (expressed or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. You should obtain independent financial, legal, tax or such other professional advice, when making your independent assessment, review and evaluation of the company/entity covered in this report and the risks involved, before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Facts, information, estimates, 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 and the same are subject to change without notice. Under no circumstances shall the Company, 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. 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 its directors, its employees and their respective associates may have positions or financial interest in the securities mentioned in this report. The Company, its directors, its employees and their respective associates may also act as market maker, may have assumed an underwriting commitment, deal with such securities and may also perform or seek to perform investment banking services, advisory and other services relating to the subject company/entity mentioned in this report, and may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The Company, its directors, its employees and their respective associates, may provide, or have provided in the past 12 months investment banking, corporate finance or other services and may receive, or may have received compensation for the services provided from the subject company/entity covered in this report. No part of the research analyst’s compensation or benefit was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Employees of the Company may serve as a board member of the subject company/entity covered 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 any liability for any damages of any kind relating to such data. This report, or any portion thereof may not be reprinted, sold or redistributed without the written consent of the Company.
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