Stock Name: FAJAR
Company Name: FAJARBARU BUILDER GRP BHD
Research House: RHB
Construction sector
Maintain neutral: While large construction companies are conventionally good proxy plays to the new wave of infrastructure spending in Malaysia, it appears that the little guys, small-cap construction players, have thus far dominated the winners' lists of the key work packages of the Kuala Lumpur International Airport 2 (KLIA2) and the Ampang and Kelana Jaya LRT line extension project.
The smaller players stand a much better chance of winning new contracts thanks to lean setups that enable them to profitably execute smaller public jobs that larger players shy away from, as well as subcontracts of key large-scale projects that will soon flood the local construction market.
Based on the last traded prices, small-cap construction stocks Fajarbaru Builder Group Bhd and TRC Synergy Bhd now trade at 7.9 to 10 times and 7.5 to 8.6 times FY11/12 earnings, at a fairly substantial discount to 16.4 to 20.6 times and 16 to 19.1 times earnings for large-cap construction companies Gamuda Bhd, IJM Corp Bhd and WCT Bhd. We believe the large discount is unjustified and untenable.
Risks to our view include: (i) the government reverting to an austerity drive to rein in the budget deficit; (ii) the potential of hiccups in the rollout of the public projects; and (iii) less than robust overseas construction markets, particularly, the Gulf states.
We are neutral on the construction sector, but bullish on small-caps. Over the immediate term, we expect construction stocks in general to perform only in line with the broader market due to 'news flow fatigue'. However, we do see a bright spot in small-cap builders due to their ability to win key work packages of large-scale projects, their better chances of winning smaller contracts and subcontracts of large-scale projects, and their attractive valuations.
Our top small-cap picks are Fajarbaru (fair value: RM1.65) and TRC (FV: RM1.94). An added downside cushion to their share prices is their strong balance sheets with a net cash of RM118.8 million or 69 sen per share for Fajarbaru, and net cash of RM200.3 million or RM1.05 per share for TRC as at Dec 31. ' RHB Research, April 4
This article appeared in The Edge Financial Daily, April 5, 2011.
Company Name: FAJARBARU BUILDER GRP BHD
Research House: RHB
Construction sector
Maintain neutral: While large construction companies are conventionally good proxy plays to the new wave of infrastructure spending in Malaysia, it appears that the little guys, small-cap construction players, have thus far dominated the winners' lists of the key work packages of the Kuala Lumpur International Airport 2 (KLIA2) and the Ampang and Kelana Jaya LRT line extension project.
The smaller players stand a much better chance of winning new contracts thanks to lean setups that enable them to profitably execute smaller public jobs that larger players shy away from, as well as subcontracts of key large-scale projects that will soon flood the local construction market.
Based on the last traded prices, small-cap construction stocks Fajarbaru Builder Group Bhd and TRC Synergy Bhd now trade at 7.9 to 10 times and 7.5 to 8.6 times FY11/12 earnings, at a fairly substantial discount to 16.4 to 20.6 times and 16 to 19.1 times earnings for large-cap construction companies Gamuda Bhd, IJM Corp Bhd and WCT Bhd. We believe the large discount is unjustified and untenable.
Risks to our view include: (i) the government reverting to an austerity drive to rein in the budget deficit; (ii) the potential of hiccups in the rollout of the public projects; and (iii) less than robust overseas construction markets, particularly, the Gulf states.
We are neutral on the construction sector, but bullish on small-caps. Over the immediate term, we expect construction stocks in general to perform only in line with the broader market due to 'news flow fatigue'. However, we do see a bright spot in small-cap builders due to their ability to win key work packages of large-scale projects, their better chances of winning smaller contracts and subcontracts of large-scale projects, and their attractive valuations.
Our top small-cap picks are Fajarbaru (fair value: RM1.65) and TRC (FV: RM1.94). An added downside cushion to their share prices is their strong balance sheets with a net cash of RM118.8 million or 69 sen per share for Fajarbaru, and net cash of RM200.3 million or RM1.05 per share for TRC as at Dec 31. ' RHB Research, April 4
This article appeared in The Edge Financial Daily, April 5, 2011.
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