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Monday, July 15, 2013

More traction post roadshow (CIMB)

Investors we met during our roadshow in Malaysia, Singapore and Hong Kong were generally positive about the construction sector. Many were keen to shift to the laggards and some were more upbeat about the beneficiaries of the oil & gas infrastructure build-out. 

Gamuda, our top pick, remained investors' core holding. There was a revival of interest in Muhibbah Engineering and Benalec, which are viewed as laggards offering attractive turnaround stories. We maintain Overweight, underpinned by the sector's new domestic upcycle driven by rail (MRT and HSR) and other infrastructure jobs.

What Happened 
Following our upgrade of the construction sector post the general elections, we went for a week-long trip to meet 45 investors in Singapore and Hong Kong with the final leg in Malaysia. Most investors concurred that the post-general elections strategy was to look at the beneficiaries of the execution of MRT 2 but some were concerned about the 1.5- to 2-year "gestation period" from 2H13 before new MRT awards were given out. We highlighted that there was a lot to look forward to beyond MRT and promoted major laggards and event-driven stocks like Benalec (Iskandar land reclamation story) and strong turnaround stories like Muhibbah Engineering (order book recovery with oil & gas angle).

What We Think 
Funds with market cap and liquidity restrictions were still keen to hold on to Gamuda. Most were looking at price points at which to accumulate rather than considering other big-caps like IJM Corp given the perceived lack of near-term catalysts. Most investors agreed with our thesis that 2H13 could be the most exciting for Gamuda given the three major events for MRT 2 (approval, launch and PDP appointment) and the asset monetisation angle (Splash and Litrak), which could lead to special dividends. For the smaller mid-caps, we sensed that investors were warming up to Muhibbah (even at these price levels), sparked by its securing of a Petronas offshore fabrication license. We believe most funds are still keen on Benalec's Iskandar story and could revisit the stock for a play in 3Q-4Q13.

What You Should Do 
Stay invested in the big-caps, which offer a strong MRT story, but also consider the smaller mid-caps like Muhibbah and Benalec. We expect sector developments to pick up in 2H13, powered by MRT, which will continue to drive interest in the sector.

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