9 September 2016

Earnings lag
Sector Update
Aggregate sector core net profit fell 14% yoy and 7% qoq in 2Q16 as
newly secured projects secured did not contribute significantly to
bottom lines. The construction companies saw strong new
infrastructure contract procurement in the first eight months of 2016
Construction
(8M16). We expect this to spur strong sector core earnings growth of
15% yoy in 2017E as most companies have record high order books. Overweight (maintain)
We remain Overweight on the construction sector. Top market and
sector BUYs are WCT, Sunway Construction, Gamuda and AQRS.
Contract awards rebound in 1Q16, fall in 2Q16
According to Construction Industry Development Board (CIDB) statistics, the Absolute Performance (%)
revised construction contract awards rebounded 7% yoy and 19% qoq to
RM39.3bn in 1Q16. Contract awards fell 40% yoy and 56% qoq to 1M 3M 12M
Eversendai 1.1 -21.7 -37.3
RM17.2bn in 2Q16, but we believe this was due to reporting delays as new Benelac -9.4 -9.4 -23.0
contract awards were high, according to news reports. All the work packages GAQRS -12.8 3.1 11.3
for the Pan-Borneo Highway (PBH) (Sarawak section) and SUKE/DASH Gamuda -1.4 -1.4 9.8
expressways have been awarded. Most of the major work packages for the IJM Corp 1.2 0.3 16.0
MRT Line 2 were also awarded. Based on news reports, we estimate about MRCB 3.2 17.1 30.0
WCT 5.2 3.8 33.0
RM50bn of construction contracts were awarded in 8M16. Suncon -0.6 5.8 50.5
Value of new contract awards likely peaked in 2Q16
We expect the value of contract awards to ease in 4Q16 as most of the
large-scale infrastructure projects have been launched. The remaining Relative Performance (%)
packages for the RM32bn MRT Line 2 and RM6bn West Coast Expressway Sunway Construction

(WCE) should be rolled out over the next 6-12 months. New projects WCT

expected in 4Q16 are the RM9bn LRT Line 3 and RM13bn Pan Borneo MRCB

Highway (Sabah stretch) and most of the contract awards should flow IJM

through to 2017. Gamuda

Gabungan AQRS
Lower earnings in 2Q16
Benalec
Aggregate construction sector net profit contracted 44% yoy in 2Q16 as Eversendai
Eversendai, IJM Corp and WCT were hit by unrealised forex losses, while 0 20 40 60 80 100 120
Eversendai incurred a RM102m impairment loss. Core net profit fell 14% Source: Affin, Bloomberg.
yoy in 2Q16 as ongoing projects for most construction companies are at the
tail-end while new contracts have not contributed significantly to earnings
yet. The property arm of some of the companies such as IJM Corp saw lower
earnings due to weaker sales and higher operating costs.
Maintain Overweight
We remain Overweight on the construction sector as news flow on contract
awards should sustain sector outperformance. We see better value among Loong Chee Wei CFA
small and mid-cap names such as Suncon, WCT and Gabungan AQRS. For (603) 2146 7548
large-cap exposure, we prefer Gamuda over IJM Corp, based on Gamuda’s cheewei.loong@affinhwang.com
higher ROE and order book/revenue ratio (better long-term earnings visibility).
Key risks to our positive view on the sector are project execution risks and rising
building material and labour costs.

Stock Bbg Rating Sh Pr TP Mkt cap Core PER (x) Core EPS gr (%) P/BV (x) ROE (%) DY (%)
(RM) (RM) (RMbn) CY16E CY17E CY16E CY17E CY16E CY16E CY16E
IJM Corp IJM MK BUY 3.45 3.76 12.4 22.3 19.7 3.5 13.3 1.2 5.9 2.9
Gamuda GAM MK BUY 4.83 5.70 11.7 20.3 17.8 (7.6) 14.1 1.7 10.0 2.5
MRCB MRC MK BUY 1.30 1.46 2.7 31.3 22.7 218.6 37.5 1.0 3.1 1.9
WCT Hldgs WCTHG MK BUY 1.62 2.00 2.0 19.4 13.6 52.0 42.2 0.8 4.5 3.7
Sunway Construction SCGB MK BUY 1.64 2.03 2.1 14.8 12.5 5.0 18.6 4.1 29.4 3.4
Eversendai EVSD MK BUY 0.47 0.67 0.4 5.6 4.9 9.2 14.6 0.4 6.5 1.1
Benalec BHB MK HOLD 0.44 0.53 0.3 15.3 10.6 83.8 44.9 0.6 4.1 3.4
Gabungan AQRS AQRS MK BUY 0.99 1.38 0.4 11.6 11.0 NA 4.8 1.1 12.3 0.0
Malaysian wgt avg 20.8 18.1 0.5 15.4 1.2 6.7 2.5
Source: Affin Hwang forecasts, Bloomberg. Note: Pricing as of close on 8 September 2016

Affin Hwang Investment Bank Bhd (14389-U)

(Formerly known as HwangDBS Investment Bank Bhd)
Page 1 of 16
9 September 2016

Contract awards rebound in 1Q16, fall in 2Q16

Revised contract awards figure shows rebound in 1Q16
The revised construction contract awards figure of RM39.3bn in 1Q16 (previous
reported figure was RM11.9bn) showed a 7% yoy and 19% qoq increase. The
roll out of the RM32bn MRT Line 2 and RM16bn PBH (Sarawak section)
projects spurred the rebound in contract awards. Although contract awards fell
40% yoy and 56% qoq to RM17.2bn in 2Q16, the sharp decline could be
due to reporting delays as new contract awards were high as reported in the
news.

Fig 1: Quarterly contract awards by government and private sector

(RM bn) Government Private

60

50

40

30

20

10

0
4Q12

2Q13

4Q13
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12

1Q13

3Q13

1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16

Source: Construction Industry Development Board

RM50bn of contract awards in 8M16

Based on news reports, we estimate about RM50bn worth of construction
contracts were awarded in 8M16. All the work packages for the RM16bn
PBH (Sarawak section) and RM5.1bn Sungai Besi-Ulu Kelang Expressway
(SUKE) and RM3.3bn Damansara-Shah Alam Highway (DASH) have been
awarded.

SUKE/DASH expressways launched

Surprisingly, most of the contracts for SUKE (RM/DASH were awarded to
relatively small unlisted contractors. JAKS Resources (BUY), Protasco (Not
rated) and Zelan (Not rated) were the only listed companies that won civil
work packages for SUKE/DASH. Gabungan AQRS secured a RM508m
subcontract from Syarikat Muhibbah Perniagaan & Pembinaan Sdn Bhd
(SMPP), which clinched the largest package worth RM1.05bn.

Large MRT Line 2 packages awarded

Most of the major work packages for the MRT Line 2 worth RM23.9bn out
of the estimated RM32bn in total were awarded in 8M16. Three above-
ground packages were awarded to incumbents, ie, Suncon, Ahmad Zaki
Resources (Not rated), IJM Corp (BUY), which undertook work on MRT Line
1. Malaysian Resources Corp (BUY) and the China Communications
Construction Company-George Kent (Not rated) joint venture (JV) are new
names in undertaking MRT civil work in Malaysia.

It is surprising that a Chinese-led JV was awarded a package, indicating

rising foreign competition for local infrastructure projects. The largest
Affin Hwang Investment Bank Bhd (14389-U)

Page 2 of 16
9 September 2016

contract awarded for MRT Line 2 was the RM15.5bn underground work
package awarded to the JV between MMC Corp and Gamuda. We believe most
of the remaining RM8bn worth of contracts for the MRT2 should be awarded by
1H17.

Fig 2: Major construction projects awarded year to date

Award date Project Contractor Value
(RMm)
Klang Valley Mass Rapid Transit Line 2 (Sg Buloh-Serdang-Putrajaya Line)
Apr-16 KVMRT Line 2 Package V201 (Sg Buloh-Persiaran Dagang) Sunway Construction 1,213
Mar-16 KVMRT Line 2 Package V202 (Persiaran Dagang-Jinjang) Ahmad Zaki 1,440
May-16 KVMRT Line 2 Package SY203 (electric trains and depot equipment) HAP Consortium 1,620
Mar-16 KVMRT Line 2 Package SBG201 (box girders for V201-V205) SPC Industries Sdn Bhd 199
Mar-16 KVMRT Line 2 Package SBG202 (box girders for V206-V210) Acre Works Sdn Bhd 170
Mar-16 KVMRT Line 2 Underground Work Package MMC-Gamuda 15,470
May-16 KVMRT Line 2 Package SY201 (signal and train control system) Bombardier-Global Rail 458
May-16 KVMRT Line 2 Package V210 (Persiaran APEC-Putrajaya Sentral) MRCB 648
May-16 KVMRT Line 2 Package V203 (Jinjang-Jln Ipoh) IJM Corp 1,470
May-16 Package DPT 203: Serdang depot TSR Capital 90
Aug-16 KVMRT Line 2 Package SSP-SY-204 (System Work Package) George Kent - CCCC (49:51) 1,007
Aug-16 KVMRT Line 2 Package V202 (Relocation of telecommunication works) UEM Edgenta 87
Sub-total 23,872

Pan-Borneo Highway, Sarawak

Mar-16 PBH Phase 1: Serian Roundabout-Pantu Junction Kimlun-Zecon 1,461
Mar-16 PBH Phase 1: Bintangor-Julau-Sibu Airport-Sg Kua Bridge (Batang Rajang Hock Seng Lee-Dhaya Maju 1,710
Bridge) Infra
Jul-16 PBH Phase 1: Works Package Contract WPC-04: Pantu Junction to Btg Gamuda-Naim Engineering 1,567
Skrang (30:70)
Jul-16 PBH Phase 1: Works Package Contract: Sg. Kua Bridge to Sg. Arip Bridge Mudajaya-Musyati Sdn Bhd 1,326
(30:70)
Jul-16 PBH Phase 1: Works Package Contract WPC-06: Sg. Awik Bridge to Bina Puri-PPES Works 1,359
Bintangor Junction Sarawak(30:70)
Aug-16 PBH Phase 1: Works Package Contract WPC-09 : Sungai Arip Bridge to WCT-KKB Engineering 1,300
Bintulu Airport Junction (30:70)
Sub-total 8,723

Sungai Besi-Ulu Kelang Expressway (SUKE)

Aug-16 CH.16700 to CH.19400: Contract no: CB3 Jaks Resources 509
Aug-16 CH.15000 to CH.16700: Contract no: Turnpike-SUKE-C-B-ML-CB2-012) Zelan Berhad 258
Aug-16 Contract no: CA2 Protasco Berhad (HCM 316
Engineering) -Hatimuda Sdn
Bhd (40:60)
Aug-16 Contract no: CA1 Cengal Jati Sdn Bhd 418
Aug-16 Contract no: CA3 Syarikat Muhibah Perniagaan 1,053
dan Pembinaan Sdn Bhd
Aug-16 Contract no: CA4 ML Sepakat-China Harbour 940
Engineering Co
Aug-16 Contract no: CB1 Cergas Murni Sdn Bhd 550
Aug-16 Contract no: CB4 Cantilever Bumi Sdn Bhd 353
Aug-16 Contract no: CB5 Bridgex - BBSB 240
Sub-total 4,636

Damansara-Shah Alam Highway (DASH)

Jul-16 Contract no: CA1 Usahasama Monza- Latimer 320
Jul-16 Contract no: CA2 Perkasa Jauhari Sdn Bhd 189
Jul-16 Contract no: CA3 Johawaki Sdn Bhd 414
Jul-16 Contract no: CA4 Panzana Enterprise Sdn Bhd 670
Jul-16 Contract no: CB1 Acre Works Sdn Bhd 454
Affin Hwang Investment Bank Bhd (14389-U)

Page 3 of 16
9 September 2016

Jul-16 Contract no: CB2 System Engineering 339

Construction Sdn Bhd
Jul-16 Contract no: CB3 HRA Teguh Sdn Bhd 391
Jul-16 Contract no: CB4 Pertama Makmur-China 476
Harbour Engineering Co
Sub-total 3,252

Other projects
Feb-16 New Sewerage Treatment Plant, Danga Bay Johor Progressive Impact Corp 44
Feb-16 PPA1M houses at Precint 17, Putrajaya Mitrajaya Holding 157
Feb-16 Mixed development complex building and external works, Section 13 PJ Mitrajaya Holding 293
Feb-16 Extension of 11-storey office building at Kota Kinabalu (Sabah Petronas Muhibah Engineering 137
Carigali)
Feb-16 Construction of a condominium Pesona Metro Holding 181
Feb-16 Samalaju-2 Substation Establishment Project in Samalaju, Bintulu Hock Seng Lee-Larsen & 281
Tourbro
Mar-16 4 Storey Temporary Sales Office, Jln Hang Tuah/Jln Pudu Zelan Bhd 38
Mar-16 Kuching City Central Wastewater Mgmt Syste Package 2 Hock Seng Lee 750
Mar-16 Work of Civil and Underground Piping in RAPID project package 2 (subcon) Ho Hup Construction 58
Mar-16 Construction of a service apartment block in Persiaran Stonor, KL Ikhmas Jaya 174
Mar-16 KVMRT SBK Line (MRT feeder buse depot at Kajang) Potensi Cekal Sdn Bhd 63
Mar-16 KVMRT SBK Line (Pasar Seni LRT link) TRC Synergy 104
Mar-16 Bored piling and basement work for a hotel in Penang Econpile Holdings 52
Apr-16 Substructure woks for a commercial development in Sg Buloh Econpile Holdings 55
Apr-16 Upgrading of Phnom Penh Airport in Cambodia Muhibbah Engineering-VCGP 88
Apr-16 Renovation works in 7 schools in Sarawak Iris Corp. Bhd 29
Apr-16 492 units of houses in Plentong, Johor Bahru Kimlun 98
May-16 Selangorku affordable apartments, Mukim Petaling Kimlun 166
May-16 Rehabilitation of Jerantut-Gua Musang railway station Fajarbaru Builder Group 260
May-16 Affordable Housing Development (Batu Berendam, Phase 3) Flonic Hi-Tec 30
May-16 Elysia Park Residence-Phase 1 Kerjaya Prospek 313
May-16 PETRONAS Refinery and Petrochemical Intergrated Development Project Barakah Offshore 84
(RAPID)
May-16 Road, Drainage, Culvert and Duct Bank Works Package at Rapid Project Mitrajaya Holding 52
Jun-16 Oxley Rising Sdn Bhd - mixed commercial building at Lot 99 Jln Ampang Econpile Holdings 208
Jun-16 Piping Erection Subcontract Package WZ Satu 19
Jun-16 Lebuhraya Persisiran Pantai Barat: FT005 Teluk Intan- Kg, Lekir, Perak WZ Satu Berhad 43
Darul Ridzuan
Jun-16 Mixed development project at PT9344 Setapak Crest Builder 438
Jun-16 Execution of pipe sleeper and underground services for Package-22 RAPIDBina Puri 73
project
Jun-16 Bridge Building across Sungai Kuantan connecting Kuantan ton to Putra Ahmad Zaki Resources 152
Town, Tanjung Lumpur, Pahang
Jun-16 Zecon Medicare Pediatric Hospital (Supply, delivery, installation, testing & SunCon 66
commissioning, training, maintainence and warranty for HT & LV and Air
Conditioning & Mechanical Ventilation System
Jun-16 Supply of MSCL Pipers & Specials for the Proposed Project Bekalan Air KKB Engineering 11.4
Luar Bandar Negeri Sarawak
Jul-16 The Apple Project (mixed development) Kerjaya Prospek Group 214
Berhad
Jul-16 Scope of Coating Work for the Johan Sverdup Export Pipeline Project Wah Seong Corporation 74
Jul-16 Cyberjaya Education Hub Phase 1 (Subcon) AWC Berhad 13
Jul-16 Mixed development project in lot 80418 (Plot 3) Persiaran Dutamas from Kerjaya Prospek Group 389
Nusmetro Property Sdn Bhd Berhad
Aug-16 Program Perumahan Rakyat in Pitas, Sabah Bina Puri 80
Aug-16 PR1MA @Sri Gading at Alor Gajah, Melaka O&C Resources Berhad 101
Aug-16 Subcontractor to Schneider Electric France SAS: Design and build up of 7 Wah Seong Corporation 167
pre-fabricated area sub-stations for a project in Kazakhstan

Affin Hwang Investment Bank Bhd (14389-U)

Page 4 of 16
9 September 2016

Aug-16 Setiawangsa - Pantai Expressway (formerly known as DUKE Phase-3): Ekovest 3,900
Design, construction, completion, operation, management and
maintenance
Aug-16 Malaysia-China Kuantan Industrial Park (MCKIP) CH.2400 to CH.4630: Fajarbaru Builder Group 21
Main access road and primary infrastructure and utilities
Aug-16 West Coast Expressway (Alignment) IJMC - KEB 41
Aug-16 Construction and completion of Part of Civil Works for Section 10- WZ satu Berhad 71
Changkat Cermin to Berus Interchange for Lebuhraya Pesisiran Pantai
Barat (Taiping- Banting)
Aug-16 Main building works for the proposed development of International School SunCon 268
or Kuala Lumpur in Jalan Ampang Hilir
Aug-16 Rehabilitation of Jerantut-Gua Musang railway station (Independent HSS Intergrated Sdn Bhd 14
Checking Consultant)
Sep-16 Building works for Eco Terraces condominium in Northeast District, Penang Kerjaya Prospek Group 147
Island Berhad
Sub-total 10,014

Total 50,497
Source: The Star, NST, Malay Mail, The Sun, The Edge, Affin Hwang, companies

Affin Hwang Investment Bank Bhd (14389-U)

Page 5 of 16
9 September 2016

Value of new contracts likely peaked in 2Q16

RM40bn worth of contracts to be awarded
We estimate about RM40bn worth of contracts will be awarded over the next 6-
12 months. We believe the launch of the RM12.8bn PBH (Sabah section),
RM9bn LRT Line 3 and RM8bn Southern Double-tracking Rail will potentially
support construction order book replenishment for the construction companies
indicated below. We believe contract awards have peaked in 2Q16 given the
record high value of the contracts awarded, including the underground contract
for the MRT Line 2. This year could turn out to be a new record year for contract
awards.

Fig 3: Contract awards expected over the next 6-12 months

Project Cost (RMbn) Potential listed co bidders
Klang Valley MRT Line 2 (Sg Buloh-Selayang-Putrajaya) 8.1 Gadang, Mudajaya, GAQRS, WCT
Pan-Borneo Highway (Sabah section) 12.8 WCT, Suria Capital-GAQRS
LRT Line 3 (Bandar Utama-Shah Alam-Klang) 9.0 Suncon, IJM, Gamuda, Gadang, TRC
Southern Double-tracking Rail 8.0 Gamuda, IJM, WCT, Fajar Baru
West Coast Expressway 2.1 IJM, WCT, WZ Satu
Total 40.0
Source: The Star, NST, Malay Mail, The Sun, The Edge, Affin Hwang

Fig 4: Annual contract awards by government and private sector

Source: Construction Industry Development Board

Record order book for construction companies

The large listed construction companies under our coverage, ie, Gamuda, IJM
Corp, Malaysian Resources Corp (MRCB) and WCT, have record order books
after securing major contracts in 2016. Including the PDP and underground
work for MRT2 and recent PBH (Sarawak section) package, Gamuda has the
highest order book at RM18.3bn in the sector. MRCB have the second largest
order book at about RM8.5bn.

Affin Hwang Investment Bank Bhd (14389-U)

Page 6 of 16
9 September 2016

Fig 5: Construction order book of companies under coverage

Source: Company, Affin Hwang estimates

Good earnings visibility

MRCB, Gamuda and IJM have the best earnings visibility in our view, as their
outstanding order book is more than 4x their historical annual construction
revenue. We believe the potential new contracts to be secured this year by
Suncon and WCT (our top sector picks) will grow their order book and improve
earnings visibility to narrow the gap with peers such as IJM and MRCB. The
recent contract win by Gabungan AQRS has also improved the earnings
visibility with an order book/annual revenue ratio to 3.7x from 2x in 1Q16.

Fig 6: Construction order book / Annual revenue ratio of selected companies

Source: Company, Affin Hwang estimates

Affin Hwang Investment Bank Bhd (14389-U)

Page 7 of 16
9 September 2016

Core earnings rebounded qoq in 2Q16

2Q16 results were generally below expectations
The construction companies reported 2Q16 result that were below our
expectations. The 43% yoy decline in aggregated net profit was mainly due
to lower asset disposal gains for IJM Corp and MRCB or impairment loss
for an associate company in the case of Eversendai. WCT and Eversendai
also incurred higher unrealised forex losses. But aggregate net profit
jumped 79% qoq in 2Q16 as earnings for IJM Corp, MRCB and WCT
rebounded from a low base in 1Q16.

Core net profit fell 14% yoy and 7% qoq as construction earnings continued
to lag. Existing construction projects were mostly near the tail end while new
projects secured have not contributed significantly to earnings. Property
earnings were also weak due to slower property sales as the demand
outlook remained cautious.

Fig 7: Aggregate construction net profit and yoy change

(RMm) Net Profit (LHS) YoY (RHS) (%)
800 150

700
100
600

500 50
400

300 0

200
(50)
100

0 (100)
1QCY15
1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

3QCY13

4QCY13

1QCY14

2QCY14

3QCY14

4QCY14

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

Source: Companies

Fig 8: Aggregate construction core net profit and yoy change

(RMm) Core Net Profit (LHS) YoY (RHS) (%)
500 25
450 20

400 15
10
350
5
300
0
250
(5)
200
(10)
150
(15)
100 (20)
50 (25)
0 (30)
1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

2QCY13

3QCY13

4QCY13

1QCY14

2QCY14

3QCY14

4QCY14

1QCY15

2QCY15

3QCY15

4QCY15

1QCY16

2QCY16

Source: Companies

Affin Hwang Investment Bank Bhd (14389-U)

Page 8 of 16
9 September 2016

Order book expansion and improving profit margins

Most construction companies saw order-book expansion to new highs with the
award of contracts for the MRT2 project (IJM Corp, MRCB, Sunway
Construction and Gamuda benefited). However, while the new projects have
not contributed significantly to bottom line in 1Q16, they should start contributing
in subsequent quarters. Construction pre-tax profit (PBT) margins were
generally weaker for the companies under our coverage partly due to higher
steel prices in the quarter. But we gather that steel prices have eased from a
peak of RM2,800/t in 2Q16 to RM1,900/t currently.

Fig 9: Construction PBT margins (%)

Year to 31 Dec 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
Benalec (12.6) 20.5 11.8 14.9 3.2 12.0
Eversendai 5.3 3.6 4.0 2.6 (10.6) (4.4)
Gabungan AQRS 3.5 1.4 (52.4) 13.8 (4.2) (0.3)
Gamuda 9.4 9.1 5.2 6.0 8.2 7.5
IJM 28.5 19.0 11.6 7.2 15.0 10.1
MRCB 1.6 12.2 21.2 (24.6) 0.7 1.0
Sunway Construction 4.2 6.3 2.4 2.2 7.0 5.9
WCT 11.0 11.9 37.9 (4.2) 1.0 5.9
Source: Companies

Affin Hwang Investment Bank Bhd (14389-U)

Page 9 of 16
9 September 2016

Maintain Overweight
Top BUYs are Suncon, WCT, Gamuda and AQRS
We reiterate our Overweight stance on the Malaysian construction sector as we
believe the sector’s core EPS growth of 15% YoY in 2017E will outpace the
market average of 8% YoY. The weighted average construction sector fully
diluted core 2016E PER of 20x is above the market average of 18x. We look for
news flow on the awards of major infrastructure projects in 2H16 to sustain the
upward re-rating of the construction stocks. Our top BUYs are Suncon, WCT,
Gabungan AQRS and Gamuda.

Fig 10: Valuations and core EPS growth for the Malaysian sectors and market
Core EPS Growth (%) Core PE (x) Yield (%) P/BV (x) ROE (%)
Sector Rating 2016E 2017E 2016E 2017E 2016E 2016E 2016E

Banks & Financial Services OW 3.0 9.5 13.4 12.4 3.8 1.5 10.1
Auto & Autoparts N 92.9 48.1 26.7 17.1 2.7 1.1 3.5
Building Materials N 28.2 2.2 23.4 23.0 4.0 2.3 9.1
Construction & Infrastructure OW (11.2) 18.1 20.1 17.3 2.8 1.3 6.9
Consumer N (6.7) 16.3 23.0 21.6 4.3 17.3 21.6
Gaming OW 14.3 10.0 16.3 14.8 1.1 0.6 4.5
Healthcare & Pharma. OW 30.0 15.8 47.6 41.1 0.6 2.4 5.1
Media N (2.5) 10.9 19.2 17.0 5.0 5.4 20.7
MREIT OW 103.7 4.4 16.6 16.3 5.5 1.1 6.8
Oil & Gas UW (25.4) 4.3 24.5 24.2 2.1 1.9 4.9
Plantation N 30.0 28.9 24.0 18.5 2.7 2.2 9.1
Property OW (1.6) 8.0 10.8 10.1 4.1 0.9 7.8
Rubber Products N 7.6 9.6 28.5 26.0 1.6 5.0 16.5
Technology OW 0.1 3.0 17.0 17.1 2.6 2.8 17.1
Telecoms N (1.0) 7.8 27.6 25.6 3.1 4.8 18.0
Timber OW (14.7) 16.2 16.8 14.9 3.0 1.1 5.2
Transports & Logistics N 28.9 (2.0) 19.4 19.7 1.1 1.1 8.8
Utilities OW 7.4 2.5 14.4 14.2 2.6 1.9 10.5
Coverage (0.1) 7.5 18.2 16.9 3.1 2.1 9.1
Source: Affin Hwang estimates, based on prices as of 8 September 2016

Affin Hwang Investment Bank Bhd (14389-U)

Page 10 of 16
9 September 2016

Fig 11: Valuations for Malaysian construction companies

Stock Bbg Rating Sh Pr TP Mkt cap Core PER (x) Core EPS gr (%) P/BV (x) ROE (%) DY (%)
(RM) (RM) (RMbn) CY16E CY17E CY16E CY17E CY16E CY16E CY16E
IJM Corp IJM MK BUY 3.45 3.76 12.4 22.3 19.7 3.5 13.3 1.2 5.9 2.9
Gamuda GAM MK BUY 4.83 5.70 11.7 20.3 17.8 (7.6) 14.1 1.7 10.0 2.5
MRCB MRC MK BUY 1.30 1.46 2.7 31.3 22.7 218.6 37.5 1.0 3.1 1.9
WCT Hldgs WCTHG MK BUY 1.62 2.00 2.0 19.4 13.6 52.0 42.2 0.8 4.5 3.7
Sunway Construction SCGB MK BUY 1.64 2.03 2.1 14.8 12.5 5.0 18.6 4.1 29.4 3.4
Eversendai EVSD MK BUY 0.47 0.67 0.4 5.6 4.9 9.2 14.6 0.4 6.5 1.1
Benalec BHB MK HOLD 0.44 0.53 0.3 15.3 10.6 83.8 44.9 0.6 4.1 3.4
Gabungan AQRS AQRS MK BUY 0.99 1.38 0.4 11.6 11.0 NA 4.8 1.1 12.3 0.0
Malaysian wgt avg 20.8 18.1 0.5 15.4 1.2 6.7 2.5
Source: Affin Hwang estimates, Bloomberg, based on prices as of 8 September 2016

Fig 12: Malaysian construction sector and market top BUYs

Top BUY Rating Analysts’ Comments
GAMUDA (GAM MK) BUY Gamuda is our top BUY among the large-cap Malaysian
construction stocks with a fully-diluted RNAV-based 12-month
Target Price : RM5.70 target price of RM5.70. Gamuda and its partners have been
Share Price as at 8 : RM4.83 appointed as the project delivery partner for the RM30bn Klang
Sep 2016 Valley Mass Rapid Transit Line 2 (MRT2) and RM27bn Penang
(RM) Transport Master Plan (PTMP). MMC Gamuda Joint Venture was
5.30
also awarded the RM15.47bn underground works contract for
5.10
4.90
MRT2. Naim-Gamuda JV also clinched the RM1.57bn Pan-
4.70
Borneo Highway (Sarawak) package. The three projects should
4.50 spur long-term earnings growth of its construction division. The
4.30 potential sale of its 40% stake in the Splash water supply
4.10 concession would provide the funding for its PTMP project. Key
3.90 risks are MRT2 project execution risks and slow property sales.
3.70
3.50
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Sunway Construction (SCGB MK) BUY SCGB is among our top BUYs for mid-cap construction stocks
with an RM2.03 target price, based on a 10% discount to its
Target Price : RM2.03 RNAV. We believe its prospects to win new infrastructure projects
Share Price as at 8 : RM1.64 are good as a pre-qualified contractor for LRT Line 3 and
Sep 2016 commercial building projects to be rolled out this year. We think
(RM) SCGB provides pure construction exposure to the cyclical upturn
1.80
1.70
for the sector. Its precast concrete division benefits from the weak
1.60 Ringgit as it derives revenue in SGD. We also believe that its
1.50 strong net cash position will support a high dividend payout and
1.40 attractive net yield of over 3% in FY16E. Key risks are higher
1.30 building material costs and rising competition for new contracts.
1.20
1.10
1.00
0.90
0.80
Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16

Affin Hwang Investment Bank Bhd (14389-U)

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9 September 2016

Top BUY Rating Analysts’ Comments

WCT (WCTHG MK) BUY WCT is one of our top BUYs among the mid-cap construction
stocks with a 12-month target price of RM2.00, based on a 10%
Target Price : RM2.00 discount to its RNAV. WCT has replenished its order book with
Share Price as at 8 : RM1.62 RM4.3bn outstanding work, improving earnings visibility. We
Sep 2016 believe WCT’s prospects to secure more local contracts have
(RM)
2.40
improved after it was pre-qualified to bid for the MRT2, LRT3 and
WCE projects. The potential construction and shopping mall REIT
2.20
listings in 1H17 should unlock values and reduce its gearing. We
2.00
expect strong 3-year core EPS CAGR of 48% in FY16-18E. Key
1.80 risks are further delays in its de-gearing plans and slow property
1.60 sales.
1.40

1.20

1.00
Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16

Gabungan AQRS (AQRS MK) BUY Gabungan AQRS (GAQRS) is our top BUY among the small-cap
Malaysian construction stocks with a RM1.38 target price, based
Target Price : RM1.38 on 10% discount to RNAV. GAQRS secured RM1.25bn new
Share Price as at 8 : RM0.99 projects YTD2016, ie, the Bukit Gambang and Dengkil PR1MA
Sep 2016 housing, and Sungai Besi-Ulu Kelang Elevated Expressway
(RM)
2.00 (SUKE) projects. This is equivalent to 4.6x FY15 revenue,
1.80 improving earnings visibility. Good prospects to grow its order
1.60
book with its potential involvement in the development of Kota
1.40
1.20
SAS, including a potential RM320m contract for the new Pahang
1.00 administration centre. Its One Jesselton Waterfront mixed
0.80 development project with net sales value of RM1.8bn will be a
0.60
0.40
game changer for its property development operations when it
0.20 kicks off in 2017. Key risks are project execution risks given a
0.00 sharp increase in order book and further delays in obtaining
Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16
authority approvals to kick start its One Jesselton project.
Source: Bloomberg, Affin Hwang

KLCON outperforms FBMKLCI

The KL Construction (KLCON) Index has outperformed the FBMKLCI by 6%
over the last two years due to positive news flow on new contract awards. The
current 12-month forward PER of 14.8x for the KLCON Index is above the long-
term mean PER of 13.4x. But the current Price/Book of 1.3x is below the long-
term mean Price/Book of 1.36x.

Fig 13: KL Construction Index vs FBMKLCI Index performance

KLCON Index FBMKLCI Index

110

105

100

95

90

85

80

75
Jul-14

Jan-15

Mar-15

Jul-15

Jan-16

Jul-16
Mar-16
Nov-14

Nov-15
Sep-14

Sep-15

Sep-16
May-15

May-16

Source: Bloomberg

Affin Hwang Investment Bank Bhd (14389-U)

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9 September 2016

Fig 14: Construction stocks relative performance to FBMKLCI year to date

Sunway Construction

WCT

MRCB

IJM

Gamuda

Gabungan AQRS

Benalec

Eversendai

0 20 40 60 80 100 120
Source: Bloomberg

Fig 15: KL Construction Index 12-month forward PER

(x)
18

16
+1SD PE, 15.0 Latest PE. 14.8

14 Mean PE, 13.4

12
-1SD PE, 11.7
10

6
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
Source: Bloomberg

Affin Hwang Investment Bank Bhd (14389-U)

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9 September 2016

Fig 16: KL Construction Index 12-month forward Price/Book

(x)
1.8

1.7

1.6
+1SD PB, 1.50
1.5
Mean PB, 1.36
1.4

1.3
-1SD PB, 1.21
1.2
Latest PB 1.30
1.1

1.0

0.9

0.8
Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16

Source: Bloomberg

Examining the 12-month PER trading bands for the Malaysian construction
stocks, we find that valuations are either close to the historical mean or at a
discount. Given the short trading history for Suncon, which was listed in 4Q15,
we examine its trading bands before the de-listing of the stock in 2006 and find
that the current PER of 14.8x (ex-cash PER of 12.2x) is below the historical
mean of 15.8x. In the current upcycle for the construction sector underpinned
by the rollout of major infrastructure projects, we believe current PER valuations
are undemanding. We believe this provides fundamental support for the
outperformance of the stocks on expected positive news flow.

Key risks to our Overweight view on the construction sector is higher building
material costs that will erode profit margins and project execution risks.

Affin Hwang Investment Bank Bhd (14389-U)

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9 September 2016

Fig 17: Gamuda 12-month forward PER Fig 18: IJM Corp 12-month forward PER
50.0 35.0

45.0
30.0
40.0
25.0
35.0
30.0 +1SD PE: 19.7
20.0
25.0 +1SD PE: 21.6 Avg: 15.3
15.0
20.0 Avg: 16.6
15.0 10.0
10.0 -1SD PE: 10.9
-1SD PE: 11.7 5.0
5.0
0.0 0.0

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg, Affin Hwang forecasts Source: Bloomberg, Affin Hwang forecasts

Fig 19: WCT Holdings 12-month forward PER Fig 20: Suncon 12-month forward PER
45.0

40.0

35.0

30.0

25.0
+1SD PE: 18.2
20.0

15.0
Avg: 11.3
10.0

5.0
-1SD PE: 4.4
0.0
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Bloomberg, Affin Hwang forecasts Source: Bloomberg, Affin Hwang forecasts

Affin Hwang Investment Bank Bhd (14389-U)

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9 September 2016

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a
recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank
Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does
not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or
rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing
view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the
Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its
associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss
of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the
Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any
securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions
or take proprietary positions that are inconsistent with the recommendations or views in this report.

Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your
financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies
and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or
investment strategies or transactions discussed in this report.

Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability
for any damages of any kind relating to such data.

The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company.

The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation.

This report is printed and published by:

Affin Hwang Investment Bank Berhad (14389-U)

A Participating Organisation of Bursa Malaysia Securities Bhd

27th Floor, Manara Boustead,
69, Jalan Raja Chulan,
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www.affinhwang.com
Email : research@affinhwang.com
Tel : + 603 2146 7599
Fax : + 603 2146 7630

Affin Hwang Investment Bank Bhd (14389-U)

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