The top-pick construction counter for the research house in this final quarter is expected to be the frontrunner for MRT 2 segmental box girder and tunnel lining segment contracts, given its strong track record and expertise in the industrial building system.

Kimlun had won numerous contract awards locally and abroad.

“That said, the group is looking to bid for more infrastructure jobs such as Pan Borneo as well as SUKE and DASH highways as compared to building jobs in diversifying their income stream from building projects alone due to the recent slowdown in the property market,” it said in a construction sector report yesterday.

Valuation-wise, Kenanga has set Kimlun’s target price at RM1.63 per share, which is valued at price-to-earnings ratio of nine times, in line with its historical average and small-mid-cap peers’ range of seven to 13 times.

In general, Kenanga said the sectoral outlook was underpinned by stable fundamentals of strong order book and its replenishments prospects. The brokerage advocated investors to accumulate quality and value construction stocks.

The basic parametres are strong order book visibility, high probability of meeting new orderbook replenishment expectations and sustainable margins and compelling valuations.

It saw value in some mid-cap contractors, especially those that have strong earnings visibility with an orderbook size that could last them for the next two to three years such as Kimlun, Eversendai Corp Bhd, Mitrajaya Holdings Bhd and Muhibbah Engineering Bhd.

“The big caps are becoming less appealing due to their potential earnings risk, underpinned by huge exposure to the property sector,” it said.

Valuation wise, it said the big-cap players had remained stable, trading at an average 16 times since its review in the first quarter.

On the other hand, the valuation for mid-cap contractors saw a mild de-rating from an average of 10 times to nine times due to the recent foreign selldown. This has led Kenanga to lower its valuation range for the mid-cap developers to between seven and 13 times from between 10 and 14 times, previously.

On the sector, it said the fundamental was still on solid ground, backed by healthy contractors’ outstanding orderbooks that provided visibility for the next two to three years and bright order book replenishment prospects over the medium term.

This was driven by a slew of infrastructure jobs whereby more construction award newsflow was expected in the middle of next year, it said.

In the upcoming Budget 2016, Kenanga expects mega rail projects MRT2 and light rail transit three to be emphasised although the project delivery partners contract has been awarded to Gamuda-MMC and MRCB-George Kent joint-ventures.

That aside, there are also talks that there is potential for the Gemas- Johor Baru electrified double-tracking railway project to be revived, which the research house expects to see in the upcoming budget.

Kenanga also believes that Budget 2016 will continue to emphasise on highway projects.


News Source: The Star, 7 October 2015

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