Reflections on Volume

Big volume without further upside equals distribution
Big volume without further downside equals accumulation

Volume tends to peak at turning points
Volume often precedes price movement
Volume is a relative study

Friday, September 3, 2010

HDBSVR: RM36b mass rapid transit to transform local construction landscape

Written by HwangDBS Vickers Research Friday, 03 September 2010 14:17

KUALA LUMPUR: Hwang DBS Vickers Research (HDBSVR) expects the RM36-billion mass rapid transit (MRT) to drive the CONSTRUCTION [] sector, once it is approved and takes off.

The research house said the probability of it being approved is high as the recent subsidy cuts suggest political will.

A key turning point could be the outcome of two consultant studies in mid-September. This project could see Gamuda’s orderbook double and MMC’s triple, but all contractors will benefit given its sheer size.

“In terms of sum-of-parts accretion, we expect additional 26 sen per share for Gamuda and 17 sen for MMC. The MRT project also ties in with another anchor market theme – government land sales. We expect MRCB’s participation in the 3,400-acre RRIM land to give it pricing power beyond our assumption of RM300 psf,” it said.

Hwang DBS Vickers Research said the 10th Malaysia Plan (10MP) tabled in June 2010 has at least set the foundation for the rollout of key projects.

“There is emphasis on upgrading the country’s transportation system with projects including seven new highways, LRT extensions, MRT and southern double tracking worth a total of RM71 billion.

“A total of 52 public-private projects (PPP) worth RM62.7bn were also identified. There is also a RM20 billion fund established to facilitate private sector investments in projects with high strategic value and multiplier effects,” it said.

HDBSVR said the sector will ultimately be driven by newsflow, but it expects more emphasis on margin recovery to monitor execution risks.

The research house expects stronger margin recovery in 2HCY10, and normalising to 9-10% in FY11; IJM is a candidate with zero legacy jobs in its orderbook currently.

From January 2007 to September 2008 – about when 9MP projects were rolled out - the KL Construction Index traded up to 24 times price-to-earnings and 2.2 times price/net tangible asset (+2SD above mean) vs mean valuations now.

“And in anticipation of more aggressive rollout of high multiplier projects, the KL Construction Index has room to trade higher and possibly test 2007/2008 highs,” it said.

HDBSVR said its high conviction picks for the sector are Gamuda and MRCB – the two largest beneficiaries of the MRT project. Its recent initiation on MMC is also an alternative MRT proxy.

“We are also positive on Gamuda’s Vietnam project that is slated for maiden launch in October. Our other BUYs are IJM as the safest proxy to the sector given its diversified earnings base and strategy to bid for a large pool of contracts, while WCT remains the proxy most leveraged to the sector. Our small cap value pick is Sunway which is trading at only 10 times CY11 EPS and will post record FY10 earnings,” it said.


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