PP 7767/09/2010(025354)

4 October 2010
RHB Research
Corporate Highlights

Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

S e cto r Upd at e
4 October 2010
MARKET DATELINE
Recom : Overweight
Construction (Maintained)

Continues To Ride On News Flow

Table 1 : Sector Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY11 FY12 FY10 FY11 FY11 FY12 FY11 FY11 FY11
Fajarbaru Jun 1.03 1.37 14.4 15.2 -10.8 5.5 7.1 6.8 1.2 12.8 5.8 OP
Sunway
Hldgs Dec 1.93 2.35 25.2 28.3 10.2 12.5 7.7 6.8 1.2 8.3 1.5 OP
Emas Kiara Dec 0.81 1.52 15.2 16.9 16.7 11.1 5.3 4.8 0.7 3.5 1.9 OP
HSL Dec 1.79 1.95 16.2 17.7 21.4 8.9 11.0 10.1 2.3 13.0 1.4 OP
MRCB Dec 2.12 2.49 6.4 6.7 23.5 4.9 33.3 31.7 2.2 20.8 0.0 TB
Gamuda Jul 3.98 4.51 19.0 20.5 36.5 7.9 21.0 19.4 2.4 52.0 3.0 TB
IJM^ Mar 5.14 5.01 32.6 34.2 2.7 5.0 15.8 15.0 1.2 8.3 2.1 MP
WCT Dec 3.03 2.30 16.9 17.4 -7.0 2.6 17.9 17.5 1.6 17.8 2.0 UP
12.7 6.8 17.1 16.0
^ FY11-12valuations refer to those of FY12-FY13

Chart 1. Construction GDP Growth

♦ Construction stocks to outperform. We are upbeat on construction
stocks as we believe they will continue to generally outperform the market (%)

from 4Q2010, buoyed by news flow from: (1) The infrastructure 8.0 7.3
7.0
development for the Greater KL National Key Economic Area (NKEA) under 6.0
5.8
4.8
the Economic Transformation Programme (ETP), particularly, the RM36bn 5.0
4.0
4.2

MRT project; and (2) The RM7bn Ampang and Kelana Jaya LRT line 3.0
2.8

extension project.
2.0
1.0 -1.5 -0.3
0.0

♦ Also news flow from other public and PFI projects. In addition, news -1.0
-2.0
2005 2006 2007 2008 2009 2010f 2011f

flow can also come from other public projects earmarked for
implementation under the 10MP, “high-impact” projects worth RM62.7bn
Chart 2. Gross Development
“under consideration” to be implemented via the private finance initiative Expenditure
(PFI), backed by a RM20bn “facilitation fund”.

♦ News flow from Federal land deals. Also, the market is likely to react (RMbn)
70.0
positively to the announcement on the formal awards of Federal land 60.0
54.2
parcels to “master developers” and the subsequent farming out of the sub- 50.0 49.5
43.8
40.6 42.8
divided smaller land parcels to various developers. Given the scale of the 40.0 35.8
30.5
projects and that most construction boys are already involved in property 30.0

business, they are likely to get a slice of the action.

20.0

10.0

♦
2005 2006 2007 2008 2009 2010f 2011f
Fair value change. We are raising our indicative fair value for MRCB by
28% from RM1.94 to RM2.49 largely to reflect higher margins from its KL
Sentral property project.

♦ Gamuda top “tactical” pick, Sunway top “value” pick. Our top
“tactical” pick for the sector is Gamuda (Trading Buy, FV = RM4.51) as
we believe its share price will be buoyed by the sustained news flow from
the RM36bn KL MRT project. Our top “value” pick for the sector is
Sunway (Outperform, FV = RM2.35) due to its undemanding Joshua CY Ng
valuations, coupled with its strong earnings visibility stemming from its (603) 92802151
joshuang@rhb.com.my
firm construction margins and growing non-construction profits.

Please read important disclosures at the end of this report.

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 4 October 2010

Continues To Ride On News Flow

♦ Construction stocks to outperform. We are upbeat on construction stocks as we believe they will continue to
generally outperform the market from 4Q2010, buoyed by news flow from: (1) The infrastructure development
for the Greater KL National Key Economic Area (NKEA) under the Economic Transformation Programme (ETP),
particularly, the RM36bn MRT project; and (2) The RM7bn Ampang and Kelana Jaya LRT line extension project.

♦ Infrastructure spending on Greater KL. One of the key targets of the Greater KL NKEA under the ETP is to
transform KL into one of the top 20 most livable cities in the world by 2020 (KL currently ranks 79 out of 130
cities in the world under an international survey). In terms of infrastructure spending, the key ones are the
RM36bn MRT system to improve the connectivity via public transport, and the clean-up and beautification of the
Klang River to improve the livability of the city and unleash the real estate potential of some 10.5km stretches
along the downstream. To improve the cleanliness of the Klang River from Class III (unsafe for body contact) to
Class IIB (recreational use with body contact), proper sewerage and sullage management (RM3.06bn) and
drainage and flow management (RM533m) will have to be invested.

♦ Construction jobs from MRT & Klang River beautification. The MRT and Klang River clean-
up/beautification projects will generate tremendous construction jobs for the construction sector. For the MRT,
Gamuda-MMC JV said before that it only intends to keep the tunneling works that make up about 30% of total
project value with the remaining 70% to be awarded out to other players on a competitive basis. YTL was
previously associated with a multi-billion proposal to beautify the Klang River. It is unclear which parties will be
in the driver seat for this “revived” Klang River beautification project.

♦ LRT news flow to sustain interest on short-listed contractors. For the much delayed Ampang and Kelana
Jaya LRT line extension project, it now appears that it is finally getting off the ground. We understand that the
tenders for the first four packages (two main contracts and two sub-contracts) already closed in end-Aug 2010,
pending evaluation by the national public transportation system holding company Syarikat Prasarana Negara
(Prasarana) (an SPV wholly-owned by the Ministry of Finance Incorporated). We understand that Prasarana will
be calling the tenders for the remaining four packages (two main contracts and two sub-contracts) soon too.
We expect the award of the first four packages to happen by the end of the year, and if not, by early next year.
The news flow on the project is expected to sustain interest on construction stocks that have been pre-qualified
to bid as main contractors and segmental box girder sub-contractors (see Table 2).

Table 2 : Contractors Pre-qualified To Bid For LRT Line Extension Project

Main Contractors Segmental Box Girder Sub-Contractors
1.Sunway Construction Sdn Bhd 1.Sunway Construction Sdn Bhd
2.Fajarbaru Builder Sdn Bhd – Signatium Construction Sdn Bhd JV 2.Fajarbaru Builder Sdn Bhd – Signatium Construction Sdn Bhd JV
3.WCT – Sinohydro JV 3.WCT – Sinohydro JV
4.IJM Construction Sdn Bhd 4.IJM Construction Sdn Bhd
5.Ranhill – CCCC JV 5.Ranhill – CCCC JV
6.Muhibbah Engineering Sdn Bhd 6.Muhibbah Engineering Sdn Bhd
7.Gamuda Berhad 7.UEM Builders Bhd – Intria Bina Sdn Bhd JV
8.UEM Builders Bhd – Intria Bina Sdn Bhd JV 8.MMC- Zelan JV
9.MMC- Zelan JV 9.MRCB Engineering Sdn. Bhd
10.MRCB Engineering Sdn. Bhd 10.BPHB – Tim Sekata JV
11.Trans Resources Corporation Sdn Bhd 11.Zabima – Leighton JV
12.BPHB – Tim Sekata JV 12.MTDC – Persys JV
13.Zabima – Leighton JV 13.Ahmad Zaki Sdn Bhd
14.Mudajaya Corporation Berhad 14.Bina Puri – Acre Works – SNC Lavalin JV
15.MTDC – Persys JV 15.UEM Construction Sdn Bhd – Projek Penyelenggaraan
Lebuhraya Berhad
16.Loh & Loh Constructions Sdn Bhd
17.Ahmad Zaki Sdn Bhd

Source: Prasarana

♦ Also news flow from other public and PFI projects. In addition, news flow can also come from other public
projects earmarked for implementation under the 10MP (see Table 3), “high-impact” projects worth RM62.7bn
“under consideration” to be implemented via the private finance initiative (PFI), backed by a RM20bn “facilitation
fund” set up to “bridge the viability gap for private sector investment in projects with high strategic value to the
nation and multiplier effects” (see Table 4), as well as the eventual formal award of Federal land parcels to
“master developers” and the subsequent farming out of the sub-divided smaller land parcels to various
developers (see Table 5). Given the scale of the projects and that most construction boys are already involved in
property business, they are likely to get a slice of the action.

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 4 October 2010

Table 3 : Key Public Project Earmarked For Implementation Under The 10MP
Value*
(RMm)
KL MRT 36,000
Ampang & Kelana Jaya LRT line extension 7,000
Gemas-JB double tracking 5,000
Flood mitigation programmes 5,000
Expansion of airports 3,300
3,580km of paved roads, of which 72% in Sabah and Sarawak n.a.
Remaining work for East Coast Expressway (Phase 2) n.a.
Kuala Lipis – Cameron Highlands road n.a.
Jerantut – Sungai Lembing road n.a.
Sewerage treatment plant in Lembah Pantai, KL n.a.
Eight hospitals (including specialist hospitals), 197 clinics and 50 1Malaysia clinics n.a.
78,000 units of affordable public housing n.a.
Repair and maintenance of public/private low-cost housing 500
Source: The 10MP
*The 10 MP & various news reports

Table 4 : “High-Impact” Projects Via PFI Under The 10MP

Value
(RMm)
Seven toll highways including West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru Expressway 19,000
and Paroi-Senawang-KLIA Expressway
Two coal-fired power plants 7,000
Development of the Malaysian Rubber Board’s 3,300 acres of land in Sungai Buloh 10,000 (GDV)
Five Universiti Teknologi MARA (UiTM) branch campuses n.a.
Redevelopment of Angkasapuri into a “Media City” n.a.
Integrated transport terminal in Gombak n.a.
Privatisation of Penang port n.a.
Senai Hi-Tech Park in Iskandar, Johor n.a.
The raw water supply project for industrial complex in Tanjong Langsat, Johor n.a.
Land reclamation in Westport, Port Klang n.a.
Malaysia Truly Asia Centre in KL. n.a.
Source: The 10MP

Table 5: Federal Land Parcels To Be Re-developed

Land Area GDV Potential Master Developer(s)
(acres) (RMm)
Matrade, Jalan Duta 65 15,000 Naza TTDI (Awarded)
Rubber Research Institute, Sungai Buloh 3,300 10,000 EPF, MRCB
Royal Malaysian Air Force, Sungai Besi 400 Multi-billion 1Malaysia Development Bhd (1MDB), Qatar Investment
Authority
Jalan Cochrane 150 Multi-billion To be auctioned
Dataran Perdana, Jalan Davis 85 Multi-billion 1MDB, Mubadala
Batu Cantonment army base, Jalan Ipoh, KL 245 - 1MDB, LTAT (Boustead)
KLCC, Jalan Ampang & U-Thant vicinity - - MRCB
Source: Various news reports

♦ Negative elements downplayed. While we believe the market is fully aware that certain negative elements
are still lingering in the sector, we feel that it is likely to “brave” these negative elements and forge ahead with
its move to position itself ahead of the curve, underpinned by the collective “buy-first-on-news” mentality.
These negative elements include: (1) A 23% lower “hard” gross development expenditure of RM138bn under the
10MP, compared with RM179bn under the 9th Malaysia Plan (9MP); (2) The still slow pace of the roll-out of public
projects as taking the delivery system to the next level appears to be an uphill battle; (3) A highly competitive
market and declining dominance of established players in large-scale projects locally; and (4) The not-so-rosy
outlook and increased operating risks in key overseas markets (following the Dubai credit crisis, Dong’s
devaluation and rising arbitration cases).

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♦ Fair value change. We are raising our indicative fair value for MRCB by 28% from RM1.94 to RM2.49 largely
to reflect higher margins from its KL Sentral property project.

♦ Gamuda top “tactical” pick, Sunway top “value” pick. We remain Overweight on the construction sector.
Our top “tactical” pick for the sector is Gamuda as we believe its share price will be buoyed by the sustained new
flow from the RM36bn MRT project. Our top “value” pick for the sector is Sunway due to its undemanding
valuations, coupled with its strong earnings visibility stemming from its firm construction margins and growing
non-construction profits.

Chart 3: MRCB Technical View Point

♦ The share price of MRCB took a breather after
successfully overcome a resistance near RM1.70 in
Jul 2010.

♦ The stock consolidated near RM1.70 but fell to a

low of RM1.61 in late Aug, before rebounding
strongly with a powerful upswing in Sep.

♦ It retook RM1.70 level and helped the 10-day SMA

to cut above the 40-day SMA and extended its rally
to a 32-month high of RM2.22 last week, before
closing Friday at RM2.12.

♦ Although the stock ended last week below the

resistance level at RM2.20, and the momentum
indicators have turned slightly downward,
indicating a possible profit-taking leg ahead, its
medium-term uptrend is expected to stay intact, as
the 10-day and 40-day SMAs remain firmly on an
uptrend.

♦ Upon the resumption of buying activities, the stock

will likely remove RM2.20 and head toward the
RM2.50 and RM2.70 levels soon, in our view.

♦ Medium-term support is seen at RM1.95, followed

by RM1.70.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

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 4 October 2010

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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