PP 7767/09/2010(025354)

26 March 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
26 March 2010
MARKET DATELINE

Recom : Neutral
Construction (Upgraded)

Investors’ Risk Appetite To Improve

Table 1 : Sector Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Fajarbaru Jun 1.06 1.35 12.5 18.1 -17.5 44.9 8.5 5.8 1.5 14.6 5.2 OP
Sunway
Dec 1.52 1.69 21.4 22.7 57.6 5.9 7.1 6.7 1.2 6.2 1.8 OP
Hldgs
Emas Kiara Dec 0.50 1.31 13.1 15.2 15.0 16.7 3.8 3.3 0.5 2.4 3.0 OP
IJM^ Mar 4.77 4.88 31.7 32.6 50.6 2.7 15.0 14.6 1.2 7.7 2.2 MP
HSL Dec 1.48 1.56 13.0 15.1 27.2 16.4 11.4 9.8 2.3 13.8 1.7 MP
MRCB Dec 1.51 1.66 7.1 7.6 86.4 8.0 21.3 19.7 1.6 21.9 0.0 TB
Gamuda Jul 2.84 2.05 13.6 16.1 40.4 17.9 20.8 17.7 1.8 97.6 2.8 UP
WCT Dec 2.74 2.10 18.2 16.9 -3.0 -7.0 15.1 16.2 1.5 14.8 2.2 UP
26.7 7.5 15.7 14.6
^ FY10-11 valuations refer to those of FY11-12

Chart 1. Sector chart/table

♦ Improved investors’ risk appetite. We are turning a little more
upbeat on the sector in 2Q2010, prompted largely by investors’ improving
Chart 1: Construction GDP Growth
(%)

risk appetite for construction stocks following: (1) The massive 6.0
4.7 4.7
underperformance of the sector vis-à-vis the market in 4Q2009 and
5.0

4.0
1Q2010; and (2) A better sector news flow and new expectations leading 3.0
3.1

up to the announcement of the 10th Malaysia Plan (10MP) in June 2010.

2.1
2.0

1.0

♦
-1.5
10MP - New expectations. Gross development expenditure under the
-0.6
0.0
2005 2006 2007 2008f 2009f 2010f
10MP is projected at RM180bn, sharply lower than RM230bn under the -1.0

-2.0
9MP. However, the shortfall will be met with RM50bn worth of projects to
be carried out via private finance intiatives (PFI). Already, we gathered
Chart 2. Sector chart/table
on the ground that a teaching-hospital project in Kuantan based on the
PFI model is now under bidding. Chart 2: Gross Development Expenditure
(RMbn)

♦ Better flow of large-scale projects going forward. In terms of the 70.0

60.0
flow of large-scale projects, we expect it to gradually pick up from 2Q 53.6 51.2
50.0
after a slow start in 1Q. We expect the remaining packages of the new 40.0 35.8
40.6 42.8

LCCT and upstream portion of the Pahang-Selangor Inter-state Raw 30.0

30.5

Water Transfer project, coupled with two excess road projects in 20.0

Sarawak, i.e. Murum and Nanga Merit, to be awarded. 10.0

2005 2006 2007 2008f 2009f 2010f

♦ IJM upgraded, HSL downgraded. We are upgrading IJM’s FY03/11-12

net profit forecasts by 15% and 4%, indicative fair value by 30% from
RM3.76 to RM4.88, and recommendation to Market Perform from
Underperform. We are downgrading HSL to Market Perform from
Outperform.

♦ We see value in small-cap and mid-cap construction stocks.

Generally, based on the current valuations, we continue to see more
value in small-cap and mid-cap construction stocks, while high valuations Joshua CY Ng
will continue to cap performance of large-cap construction stocks. We are (603) 92802151
now Neutral on the construction sector, upgraded from Underweight joshuang@rhb.com.my
previously.

Please read important disclosures at the end of this report.

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 26 March 2010

Investors’ Risk Appetite To Improve

♦ Improved investors’ risk appetite. We are turning a little more upbeat on the sector in 2Q2010, prompted
largely by investors’ improving risk appetite for construction stocks following: (1) The massive
underperformance of the sector vis-à-vis the market in 4Q2009 and 1Q2010; and (2) A better sector news flow
and new expectations leading up to the announcement of the 10th Malaysia Plan (10MP) in June 2010. We
believe these may to a certain extent, moderate the negative elements that have weighed down on the
performance of the construction stocks over the last two quarters such as: (1) The slow pace of the roll-out of
public projects, shrinking margins and declining dominance of established players in large-scale projects locally;
and (2) The not-so-rosy outlook and increased operating risks in key overseas markets (following the Dubai
credit crisis, Dong’s devaluation and rising arbitration cases).

♦ 10MP - New expectations. Gross development expenditure under the 10MP is projected at RM180bn, sharply
lower than RM230bn under the 9MP. However, the shortfall will be met with RM50bn worth of projects to be
carried out via private finance intiatives (PFI). Already, we gathered on the ground that a teaching-hospital
project in Kuantan based on the PFI model is now under bidding. We understand that this RM400m project
comes with a 25-year concession (construction period of 3.5 years + operating period of 21.5 years). Assuming
a 70:30 debt-to-equity structure, the contractor will have to fork out RM120m “seed money” to be put into the
special purpose vehicle (SPV) as equity with the balance RM280m to be raised from the debt market in the form
of SPV borrowings.

♦ Better flow of large-scale projects going forward. In terms of the flow of large-scale projects, we expect it
to gradually pick up from 2Q after a slow start in 1Q. We expect the remaining packages of the new LCCT and
upstream portion of the Pahang-Selangor Inter-state Raw Water Transfer project, coupled with two access road
projects in Sarawak, i.e. Murum and Nanga Merit, to be awarded. As to the much anticipated Ampang and
Kelana Jaya LRT line extension project (total value of RM7bn of which only half is civil works), it now increasingly
appears that it is unlikely to be in full swing this year due to various issues including public objection, design,
alignment, basis of contract award, land acquisition and funding (see Table 2).

Table 2: The Expected Flow Of Large-Scale Projects

Project Value (RMbn)
2009 (Awarded)
Pahang-Selangor Water Transfer - Upstream (water tunnel) 1.3
Medini, Iskandar (utility & infrastructure packages) 1.0
New LCCT (Earthwork Package 1) 0.4
Sub-total 2.7

2010
New LCCT (Earthwork Package 2) (Awarded) 0.3
New LCCT (Terminal, satellite, parking apron & runway) 1.9
Pahang-Selangor Water Transfer - Upstream (Klau Dam, dual pipelines & Semantan pump station) 2.5
Nanga Merit access road, Kapit, Sarawak 1.2
Murum access road, Kapit, Sarawak 0.9
Sub-total 6.8

2011
Ampang & Kelana Jaya LRT line extension (civil works) 3.5
Medini & EduCity (infrastructure and building) 2.0
Mengkuang Dam, Seberang Prai 1.0
Sub-total 6.5

2012 & Beyond

Gemas-JB double tracking 5.0
Pahang-Selangor Water Transfer - Downstream (Langat 2 water treatment plant) 4.1
Kota Damansara - Cheras new LRT line 25.0
Sub-total 34.1
Total 50.1
Source: Bursa Malaysia, RHBRI, various news reports

♦ Changes in forecasts and recommendation. We are revising up IJM’s FY03/11-12 net profit forecasts by
15% and 4%, having updated our earnings forecasts for IJM Plantations and IJM Land. Indicative fair value is
raised by 30% from RM3.76 to RM4.88 based on 16x (from 14x previously) revised fully-diluted EPS of 30.5sen.
The 2x multiple premium above our 1-year forward target PER for the construction sector of 10-14x is to reflect:
(1) IJM’s group earnings that are resilient as reduced construction profits due to sharp increases in construction

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 26 March 2010

input costs will be cushioned by higher plantation profits during a commodity price upcycle; and (2) IJM’s largely
trouble-free position as it is not involved in any major arbitration cases in the overseas market. Upgrade IJM
from Underperform to Market Perform. Also, we are downgrading HSL to Market Perform from Outperform
as valuations have become less compelling after the sharp run-up in share price recently. There are no changes
to forecasts, recommendations and indicative fair values of other construction stocks.

♦ We see value in small-cap and mid-cap construction stocks. Generally, based on the current valuations,
we continue to see more value in small-cap and mid-cap construction stocks, while high valuations will continue
to cap performance of large-cap construction stocks. We are now Neutral on the construction sector, upgraded
from Underweight previously.

Table 3: Key Areas That Stand To Receive Substantial Allocations Under Budget 2010
Key Area/Sub-segment Value
(RMm)
1. Hospitals and clinics 14,800 (Part of)

♦ Construction and upgrading of hospitals in Kluang, Bera, Shah Alam, Alor Gajah & Tampoi na

2. Civil infrastructure projects 9,000

♦ Roads and bridges 4,700

♦ Water supply and sewerage 2,600
♦ Rail facilities 899
♦ Seaports 820
♦ Airports 276

3. Regional corridors 3,500 (Part of)

♦ Public housing in Iskandar na
♦ Cleaning of Segget River in Iskandar na
♦ Farming entrepreneurs training centre in Northern Corridor Economic Region (NCER)
♦ Widening of federal roads (Kuala Krai – Gua Musang, Kuala Lipis – Raub – Bentong) in East Coast na
Economic Region (ECER)
♦ Access roads for Murum Dam and Baram Dam in Sarawak Corridor of Renewable Energy (SCORE) na

4. Schools 2,700
♦ 80 new schools, 1,100 additional blocks & 347 replacement schools 1,600
♦ School upgrading, especially in Sabah & Sarawak 1,100

5. Infrastructure in rural areas 2,300

♦ 510km of rural road & 316km of village roads including those in Kapit, Lawas and Simunjan in 857
Sarawak & Kinabatangan, Kota Belud & Keningau in Sabah
♦ Electricity supply to 30,000 houses 825
♦ Water supply to 16,000 houses 530
♦ 5,356 rural clinics, community halls & public recreational areas 88

6. Public-private partnership na
♦ CIQ in Bukit Kayu Hitam na
♦ 6 UiTM campuses na
♦ MATRADE Centre Naza

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IMPORTANT DISCLOSURES

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differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
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persons may from time to time have an interest in the securities mentioned by this report.

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of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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