Stock Picks – Construction Sector – October 2010

While the fundamental outlook remains pretty much unchanged, we do note that the positive news flow surrounding the sector has been accelerating of late. We believe this will help further re-rate valuations of contractors upwards. Implementation of the mega projects under the ETP should serve to maintain the momentum of positive news flow. In short, we think there is potential for some irrational exuberance to set in. News flow aside, the 59.4% increase in domestic contact awards will serve to drive earnings growth over the next few years. With the KLCON now trading at its long term average of 15x, we see further room for rerating, potentially up to one standard deviation above mean (μ+1σ) level of 19.3x.

We are upgrading our sector call from Neutral back to OVERWEIGHT as we expect the positive news flow in the coming months to rerate valuations upwards. Our top picks are Mudajaya (BUY, TP: RM7.22) and Sunway (BUY, TP: RM2.52). Both our top picks are backed by strong earnings growth with a 3 year CAGRf of 33-37%. For the small caps, we like Ahmad Zaki (BUY, TP: RM1.27) which has witnessed very strong orderbook wins over the past 12 months. We also like Gamuda (TRADING BUY, TP: RM4.31) for the euphoric MRT play. In our view, investors should position themselves for the thematic Sarawak play fuelled by the upcoming state elections; pick Naim Holdings (BUY, TP: RM5.10).

Below are the target price for construction sector.

Source : OSK Research

Tagged as: AZRB, MRCB, Sunway