How Much More For Construction Stocks?

Safe to say that construction stocks have been hogging the limelight. Domestic contracts for 3Q stood at RM5.6bn, which was a stupendous +377% y-o-y. Contract wins from 1Q-3Q have already surpassed last year’s full year amount of RM10bn. Sarawak infra play continues to be the recurring themes witnessed. We
expect the momentum of positive news flow to continue, fueled by projects scheduled under the ETP.

The Economic Transformation Programme unveiled by Pemandu seems to manage to capture international funds' attention this time around. There is a sense of urgency and conviction about an implementation schedule, which usually do not accompany many of the past government's initiatives.

Most of the interest was centred on the Greater KL NKEA. Key projects
to be implemented in Greater KL are the MRT (RM43bn), Malaysia-Singapore High
Speed Rail (HSR), River of Life and covered walkways within the city centre.

In addition to the above, we will have the Budget 2011 on 15th October. There seems to be a number of progressive catalysts for the markets to feed on over the next few weeks. The completion of the MRT feasibility study by the Land Public Transport Commission is anticipated by mid October as well.

Following that we will have project details of the Economic Transformation programme on October 25th. To be followed by the award of the LRT extension by end of Oct or early November.

Gamuda is likely to be the top pick from most research houses. The Gamuda-MMC 50:50 JV will likely to be key beneficiary of the MRT project which has been given the first right of refusal to match the lowest bidder for tunneling works worth RM10.8bn. The JV is also interested in taking on a project management role for the entire project at an agreed fee. The tunneling portion alone will add about 40sen to NAV.

IJM is on track to get the LRT extensions project. Possibly, IJM will get a good sniff for the non-tunneling portion of the MRT project worth RM25.2bn as well. IJM share price has been flat because of selling by Zelan, which currently holds 81mn shares as at the end of Sept 2010, after selling 7mn shares in the market over the last few weeks.

Zelan recently obtained approval to sell up to 30mn shares in total, which implies a balance of approximately 23mn shares to be sold over time. Given the selling pressure, it is clear that IJM's share price does not factor in any froth from the MRT/LRT ext/Budget or even the ETP news flow. This makes IJM very attractive compared to Gamuda. Selling pressures is an artificial barrier that does not take into account the prospects of IJM. Collect aggressively.

In addition, there is a good likelihood that IJM may take its 62% subsidiary, IJM Land, private. IJM said it was only in May 2009 it had placed out shares to fulfill the shareholding spread requirements of IJM Land. I doubt IJM wants to continually be bothered with IJM Land's liquidity, better to take it private. By doing so, it might enable the parent to be the component stock of the benchmark FBM KLCI, which is quite a nice positive. Automatically there will be fresh long buyers, in particular from indexed funds.

IJM Corp is currently one of the FBM Mid-70 stocks and in the reserve list for the FBM KLCI. The inclusion may benefit IJM Corp as it could put them into the top 30.

The others that I like is Mudajaya. I see no dark spots despite the final warning on the conclusion of the recent probe. I see its fair value above RM6.00 anyway. For the small boys I think Ahmad Zaki (AZRB) has ways to go. Fair value in 3-6 months @ RM1.25.