MRCB


OSK maintain OVERWEIGHT rating on construction sector, driven primarily by:

(i) implementation of the various projects under the ETP, and

(ii) the potential of more contract awards as the Govt attempts to generate a feel-good factor given the potential of an early General Election.

Gamuda, Mudajaya and KimLun are OSK’s top picks

Below are the target price for selected stocks in construction sector.

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Maintain OVERWEIGHT. We believe that our RM18bn domestic jobs win target for 2011 could likely be breached should the various projects under the ETP kick off faster than expected. Given the likelihood of an early General Election this year, we expect the momentum of news flow within the sector to accelerate.

Our top sector pick is Gamuda for its MRT exposure, with its Vietnam property launches and resolution of the water assets consolidation as the wild card. For the small caps, we like Ahmad Zaki. In view of the state elections which must be held by May, we continue to like the Sarawak theme and highlight sector laggard Naim Holdings. Investors may also consider looking at Iskandar construction plays, with Kim Lun as key proxy.

Below are the target price for selected stocks in construction sector.

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We are of the view that the LRT extension job could be awarded soon, possibly by year end. We have identified several locations where site clearing is now in progress. Our channel checks indicate that there will only be 2 main packages for civil works collectively worth RM2bn.

As such, we expect the momentum of positive news within the sector to accelerate in the coming months and rerate our valuations upwards. Maintain OVERWEIGHT on construction.

Below are the target price for construction sector.

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construction

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.

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warrant

Previously we look at Warrants, there are another type of warrants traded in Bursa Malaysia. We call it Call Warrants. Below are short brief explanation about Call Warrants.

Call Warrants give a right, but not an obligation, to buy a fixed number of stock shares at a specified price within a limited period of time. But unlike warrants, call warrants are issued by third parties based on existing stock shares. Therefore, they do not increase the issued capital or dilute the earnings of the company as a warrant do. Call warrants have maturity dates of not more than two (2) years

The table below shows Local Call Warrants that currently traded in Bursa Malaysia together with its maturity dates and exercise price as of 10th August 2010.

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