LRT-B on The Verge of Takeoff (OSK)

We gather that an award for the LRT-B construction contract is forthcoming, with the Kelana line valued at RM700m and the Ampang line at RM800m-RM1bn. The same 17 contractors that prequalified for the LRT-A construction package are also eligible for the B portion. Based on our channel checks, we believe that 4 companies - TRC, Sunway, Bina Puri-MRCB JV and WCT - may be the front-runners. We remain OVERWEIGHT on the sector and believe the momentum of contract awards will pick up in 2H.

Our stock calls. Among the potential LRT-B winners highlighted, we have BUY ratings on TRC (FV: RM1.00, split and bonus adjusted) and WCT (FV: RM3.69). We also have TRADING BUY calls on MRCB (FV: RM2.58) and Sunway (FV: RM3.27), while Bina Puri is NOT RATED. If we were to rely on gut feeling, we think that TRC and Sunway have an equal chance of securing the Kelana line while for the Ampang line, we are betting on the Bina Puri-MRCB JV. The dishing out of LRT-B is not the end of the story as there would still be subcontracts (e.g. stations) which will benefit the other prequalified contractors.

Maintain OVERWEIGHT. Despite the weak domestic contracts flow for 1H (see our report, “Jobs Flow Tracker: 2Q 2011’’), we remain optimistic for 2H. The impending LRT-B award should serve to boost contract awards in 2H. We are also upbeat on the elevated portion of the RM12bn MRT Sungai Buloh – Kajang (SBK) line, for which tenders will be called very soon. Among the bigger caps, our top picks remain Mudajaya (BUY, FV: RM7.30) and Gamuda (BUY, FV: RM4.80). As for the small caps, we are replacing KimLun with TRC given the potential awards from the LRT and MRT.