KUALA LUMPUR: CIMB Equities Research sees the order book replenishment outlook for contractors across the board (on account of the reinstatement of cancelled/ deferred jobs) has greatly improved compared to a year ago.

In its report on the construction sector on Tuesday, it expects the tender environment to be more competitive where prevailing contract margins, on average, could be in the region of 5%-6%, similar to the blended margins for the ongoing MRT 2 (SSP Line) project, particularly for subcontract packages.

“However, a recovery of project awards and contract tenders are typically positive for share prices of contractors, ahead of actual job wins and impact on earnings.

“For this, we highlighted potential beneficiaries of new tenders over the next six to 12 months which include IJM Corp, Sunway (via Sunway Construction), WCT Holdings, and Muhibbah Engineering for companies under our coverage. 

"For non-rated (NR) stocks, we believe HSS Engineers, Gabungan AQRS, Econpile, and Gadang are among the names that could prequalify in the upcoming new rail bids from our revised list of RM140bil projects in the pipeline,” it said.

CIMB Research recently met with over 50 domestic buy-side fund managers and analysts across 28
organisations during our three-day road show on the construction and water sectors. 

“We sensed that investors are generally sceptical on the return of the water capex angle but are receptive to our view that infra spending on old pipe replacement should make a comeback. On the construction outlook, much was discussed about the sector’s upside risks in 2H19F, East Coast Rail Line’s (ECRL) first stage tenders, and the best-case outlook for 2020,” it said.

Investors’ views on the construction sector were mixed. Some are positioning for the bullish case that the KL-Singapore HSR and MRT 3 (Circle) will eventually be implemented, and are selective in rail stock selections, particularly on the past winners of rail contracts. 

On the other hand, given the significant sector rerating YTD, some investors were more inclined to remain on the sidelines for now and take profit on selected stocks which are close to, or, have risen above their pre-GE14 levels.

On the East Coast Rail Line (ECRL), CIMB Research said it had explained that the Dungun-Mentakab stretch (190-200km) could emerge as the first stage tenders for the East Coast Rail Line (ECRL). 

This is considering that the other scopes, i.e. the northern and southern portion would require a realignment and therefore would need some time for the approval of the railway scheme. 
Working on the RM68.7mil revised cost/km, the value of the Dungun-
Mentakab stretch (including stations) works out to RM13.1bil-RM13.7bil. 

A 40% local content share translates to RM5.2bn-5.5bn total value of addressable tenders for ECRL’s first phase of civil works which could be launched as early as 4Q19. 

ECRL’s prequalification rounds will be launched at end-May.

CIMB Research expects this to attract a large number of rail contractors, both listed and unlisted, given the absence of new mega rail job tenders since last year. Scope of civil works to be subcontracted covers building, road, structural, foundation, soil improvements and earthworks.

“We shared our best-case outlook for 2020, which hinges on 1) outcome of the review of the KL-Singapore High Speed Rail (HSR), on which a decision is expected by May 2020, 2) potential new implementation plans for MRT 3 (Circle Line), which, according to recent news reports, is currently undergoing renegotiations for up to a 50% reduction in the original RM40bil to RM45bil cost and 3) Progress of the RM46bn Penang Transport Masterplan’s (PTMP) land swap funding scheme via the Penang South Reclamation (PSR).

“While a potential pick-up in newsflow for all three projects in the coming month should buoy positive sentiment on the sector, most investors shared our view that funding would ultimately dictate how and when the projects can proceed, unless new rail projects adopt a foreign contractor EPCC model (similar to the ECRL), or a JV between a foreign and a local contractor with private sector funding scheme.

“For PTMP’s LRT and Pan Island Link phase 1 (PIL1) projects (RM18.6bil combined value), construction works would be able to commence in 2020 (best case scenario as targeted by the Penang state government) if the Project Delivery Partner (PDP) or Master Developer is able to secure sufficient bridge financing or federal government soft loan/grant to kick off tenders and awards for the LRT and PIL1 ahead of the land reclamation works, which we estimate to cost as much as RM19.6bn (4,500 acres, three islands), based on E&O’s average reclamation cost of RM100psf for the Seri Tanjung Pinang (STP) project,” CIMB Research said.