UOB KayHian Overweight on Malaysia construction sector on high-speed rail newsflow

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UOB KayHian is staying overweight on Malaysian construction players on expectations that newsflow around the planned Singapore-to-Kuala Lumpur high-speed railway will pick up.

The brokerage noted that the project delivery partner (PDP) for construction works will likely be tapped by the second half of this year, to keep the project on its 2026 operational timeline.

“We believe competition for the PDP role could be stiff, given the strong consortiums,” it said in a note on Wednesday.

Four consortiums have submitted intentions to secure the PDP role, UOB KayHian said, citing media reports that they were a Gamuda-MRCB joint venture, a YTL-SIPP joint venture, a Naza Group-China Communications Consruction Company (CCCC) tie-up and an IJM-Sunway Construction-Jalinan-Maltimur joint venture.

“These joint ventures look strong, with the first two consortiums having strong competitive advantage due to their experience and strong relationships with the authorities,” UOB KayHian said, adding that the race between Gamuda-MRCB and YTL-SIPP could be close.

Earnings impact

The brokerage estimated PDP fees would come in around 1.6 billion ringgit to 1.8 billion ringgit at the net profit level, assuming the civil construction works are valued at 35 billion ringgit to 40 billion ringgit and based on PDP fees capped at 6 percent of construction cost.

“Assuming a five-to-six year construction period, income from project management fees could be worth 266 million ringgit to 365 million ringgit yearly on a straight line recognition basis,” it said.

The impact on the companies’ earnings could be large.

UOB KayHian’s earnings sensitivity analysis found that a 25 percent stake in the PDP could yield IJM anywhere from 11.6-15.9 percent of its fiscal 2017 earnings. For Sunway Construction, a 25 percent stake could yield 43.5-59.6 percent of its fiscal 2017 earnings and a 50 percent stake for MRCB could yield more than all of its fiscal 2017 earnings, the analysis showed. For Gamuda, a 50 percent PDP stake could yield 19-26 percent of its fiscal 2017 earnings, the analysis showed.

Physical construction works could also benefit contractors including Gabungan AQRS, WCT Holdings, Econpile, Ahmad Zaki, Muhibbah Engineering, Gadang and TSR Capital, UOB KayHian said.

UOB KayHian added that HSS Engineers, an engineering consultancy for urban infrastructure, could be a potential beneficiary of consulting works.

It rates Gamuda, IJM and Gabungan AQRS at Buy, and it rates WCT Holdings and Sunway Construction at Hold. UOB KayHian doesn’t rate YTL and HSS Engineers.

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