4 Interesting Questions on Budget 2012

Well, well, well... The newly announced Budget 2012 seems to be a very holistic one, which covers almost everyone (even the opposition MPs). In the budget, a total of RM232.8 billions was allocated to implement all Government development plans, which include the projects and programs under various plans, focusing on the well-being of the rakyat. But, there are a few interesting questions that Finance Malaysia would like to highlight here.

1) Is it too optimistic?

As we all know, the external environment is becoming more challenging once again due to slowdown in US, Europe and Japan (if not double-dip recession). This would definitely impact Malaysia as manufacturing sector still playing a crucial role in our country's growth. While IMF is revising downward the global growth next year, our Government is projecting a 5 - 5.5% growth this year, and 5 - 6% for 2012. I think we should be very happy if Malaysia can grow more than 4.5% for 2011 and 2012.

2) Budget Deficit to come down?

Taking into account the estimated revenue and expenditure, the Federal Government deficit in 2012 is expected to improve to 4.7% of GDP compared with 5.4% in 2011. As we all know, Petronas is the main contributor to Government's revenue, which is heavily relies on crude oil prices. How much is the estimated price Government based on 2012? It does not stated. Of course, it should be lower than current year. Am I correct?

3) Construction sector to be one of the main growth engine?

By setting a 7% growth forecast for Construction sector next year, is it too optimistic (yet again)? Given the current state of delayed tendering process, land acquisition dispute and change of project owners (MRT project), I doubt the execution part of the beautifully layout projects. Do remember that Hong Kong and Singapore takes more than 5 years just for planning for their MRT projects. And, if we can kick-start so soon, sure Malaysia Boleh!!!

4) Is it really Rakyat-centric?

Just as rakyat coping with high living cost, especially in urban areas, there is some relieves after the Government's latest various incentives and rebates. Subsidies on some of the basic food items were continued. Concurrently, our MPs also have higher allowance. This seems like a win-win situation. However, would the Government forgot about another very important item - petrol? As promised earlier, our petrol prices are adjusted according to market price. Judging from the fallen crude oil prices lately, why Government still not yet lower petrol prices? I believe this is definitely a better and more effective way to help rakyat.

New IPO: Eversendai

En-route to Main Board of Bursa Malaysia on 1st July 2011, Eversendai Corp is a structural steel specialist with operations predominantly in the Middle East, Malaysia and India. Currently, the company is bidding for RM1.5 billion worth of infrastructure, high-rise building and power plant projects in Southeast Asia, India and Middle East after being invited by public and private sectors.

Its outstanding construction order book stood at RM1.4 billion as at 16th May 2011, while owning 4 fabrication plants in Malaysia and Middle East with a combined annual capacity of 119,000 tonnes.

What is so attractive about Eversendai?

According to RHB Research, Eversendai's key appeal to investors lies in:

1. It being a rare "outside-looking-in" home-grown construction company that has excelled in the international market, particularly, the Middle East, based on its own strength, practically almost indifferent to the local construction cycle;
2. The recognition by key international contractors as a highly reliable structural steel contractor from past assignments puts Eversendai in a sweet spot in the sense that it is often named the structural steel subcontractor by most international contractors participating in the same international tenders;
3. Its strong market position in UAE and Qatar by virtue of its 26.5% market share in terms of fabrication capacity; and
4. Its good earnings visibility underpinned by RM1.4 billion outstanding order book and strong likelihood of securing about another RM1 billion worth of new jobs by end of the year.

Eversendai's expertise in power plant was gained from the construction of the Tanjung Bin, Manjung and Jimah power plants several years ago. In India, it has 4 on-going power plant projects.

Source: Business Times

Source: RHB Research

Maybank Investment Bank Bhd is the sole adviser, underwriter and book runner for the IPO. Meanwhile, RHB Research is projecting the earning per share (EPS) of Eversendai to grow by 15.1% and 12% in FY12/12-13, assuming it is to secure RM1.4bn, RM1.5bn, and RM1.6bn worth of new contracts in FY12/11-13. As such, it arrived at an indicative fair value of RM2.27 for Eversendai based on 14x FY12/12 EPS.

If that is true, there is a 33% upside from the RM1.70 IPO price. Would it be a good BUY?

Update:
Eversendai final retail price fixed at RM1.62 per share, while institutional price at RM1.70.

MRT at Iskandar: Is it Viable?

When everyone talk about mass rapid transit (MRT) system at KL, it's reasonable given the terrible bumper to bumper traffic jam every working days. Certainly, it creates a buzz in Malaysia with its RM50 billion price tag. Maybe because of the buzzing topic, Iskandar Regional Development Authority (IRDA) also looking at the possibility of implementing a 500km MRT within the region which would also provide a direct link to Johor Bahru. The project is scheduled for completion by 2020. What's your reaction?

I believe many people will think the same with me - unbelievable. My jaw drops down the floor thereafter. We do not have to perform  those sophisticated calculation to judge whether the Iskandar MRT is viable or not. I came out with these 3 points.

3 Stupid Questions to ask our-self

1. Population
• KL is capital of our country, while Iskandar is a region which encompass the capital of a state
• Do you think that Iskandar has more people than than the capital of KL?
• Some more, Iskandar is 3x larger than Singapore, but with much lesser population
2. New vs Old
• KL is an not well planned city, which contributes to traffic problems now
• However, Iskandar is a new city with ample of land, with ample of time to plan. Why not take your land and time as an advantage to plan ahead?
• We don't have choice in KL, we're forced to resort to MRT
3. Alternative ways
• Well, everyone knows that MRT system is an extremely expensive project. Thus, we should source for other ways first, before considering MRT.
• With ample of vacant lands still available now, why straightaway jump to MRT?
• Also, population are not there yet, what's the urgency to build MRT now?
• Instead, we should consider the following system first: Roads, Bus, Highways, LRT, then only MRT. MRT should be the last due to higher cost.

The 5 flagship zones of Iskandar Malaysia, namely Johor Bahru City (A), Nusajaya (B), Western Gate Development (C), Eastern Gate Development (D), and Senai-Skudai (F)

Wait... What am I using? Common sense, man (without calculator in my hand).

To support my view, below is what written by OSK Research:

"We feel that the chances of the Iskandar MRT being implemented anytime soon is slim. Based on IRDA's estimated cost of RM30m/km, the entire project will work out to RM15bn which is certainly a huge sum. Although an efficient public transport network is a crucial element of Iskandar to emerge as a thriving metropolis region, we think that it is still too soon for an MRT to be built. At this juncture, we believe that the Federal Govt is probably going to focus more on the KL MRT, LRT extension and various other ETP projects to ensure that it kicks off on time before considering the Iskandar MRT."

Source: IRDA, Iskandar Malaysia website

OSK Stock Picks for April 2011

After being hit by a few Black Swan events, markets rebounded in March with the KLCI ending 1Q in the black. Moving into 2Q, we still see some short term volatility but are confident of an eventual rally to close in on our year-end KLCI target of 1680 points. We advise investors BUY Big Caps on potential rebounds while focusing on the more defensive Small Caps given their superior performance over the past few months. The favorite sectors remain Banks, O&G, Property and Construction in the mid-to-short term while the longer term buys are Media and Healthcare. This strategy is reflected in our April top buys as well.

Timber the BIG winner...

For March, timber stocks were actually the big winners, including names such as Suber Tiasa, Jaya Tiasa, TaAnn, WTK and Lingui, on hopes for better timber demand in view of reconstruction efforts in Japan. Nonetheless, these counters are not part of the FBM100. Instead, among the FBM100 constituents, media player Media Chinese and Petronas companies Petronas Dagangan and Chemicals were the big winners. Sectoral wise, O&G led the way followed by Technology (JCY), Media (MCIL), and Gaming (Genting).

Outlook: Moving into 2Q

Moving into 2Q, we see the possibility of some short-term volatility for the remainder of 2011 but market fundamentals remain sound. We maintain our year-end KLCI target of 1680 points based on an average of the 2011 KLCI fair value (1648 points 16x PER) and 2012 KLCI fair value (1710 points 15x PER). With this in mind, we maintain Overweight on the Malaysian market. Our view is driven by 4 key factors:

• The economy will continue to grow
• Upside and Downside are fairly equal
• News flow ahead of the General Election remains very supportive
• Earnings should match expectations

For April - A month of 2 Halves

We believe that there may well be 2 distinct halves in the month of April. The first half should be positive for the market, with the one of the key factors being the Invest Malaysia conference which will be held on 12 April. Among the announcements could be:

• The disposal of Khazanah's stake in Pos Malaysia
• The next Risk Service Contract for marginal oil fields
• Release of Government lands for property development

However, for the second half of the month, we are concerned of greater market volatility, due to potentially less positive outcome of the Sarawak elections. Since BN already holding more than 80% of the state seats, we believe the risk is that their performance may drop in this upcoming election. Consequently, this may spark some knee jerk selling until the 1Q2011 reporting season.

Source: OSK Reseach Report

OSK Stock Picks for March 2011

By OSK Research,

Despite relatively strong results from a number of Blue Chips in February, the market still retreated and ended up in the red so far in 2011. Selling was largely attributed to concerns arising from political unrest in the Middle East although we continue to see limited risk if this does not spread to Saudi Arabia.

Go out and BUY?

Trading Strategy - Buy on Weakness

OSK continue to advise investors to Buy on Weakness in the current volatile market with focus on Banks, especially those that have been sold down recently as we still see robust loans growth of 8.5%. OSK also advise trading in Oil & Gas, Construction and Property counters as the news flow should remain good although they caution that profits will likely to kick in only in 2H of 2011.

March 2011 Top Buys

OSK's top buys did poorly for February, with only 2 stocks matching or exceeding the KLCI namely KPJ and Kencana. For March, as we remain hopeful of a market rebound, we are keeping CIMB, Kencana and SP Setia as our top buys. At the same time, we have added in defensive plays such as Petronas Gas and also retain KPJ.

Source: OSK Research

By Finance Malaysia,

While we are hopeful that the unrest in Middle East will eased soon, without spreading to Saudi Arabia, I think investor should trades cautiously as long as KLCI did not break free from the 1,500 psychological level. In terms of sector, I prefer Oil & Gas and Construction sector mainly because of Malaysia government's "preferred play". I view these sector as more defensive to global uncertainties, as Petronas and government is the main projects sources for O&G and construction sector respectively.

Related Posts:

Why Malaysia Market keeps going UP?

Game-Over for Construction Sector? (28 Feb 2011)

All are going very well for Malaysia construction sector last year in line with the recovery of economy until it hit the first "hard bump" last week. We all know that construction sector is very volatile, influenced by the health of global economy, government's pump-priming projects, and of course the huge overhead costs such as labor and building materials costs.

Somehow, unrest at Middle East are hogging the bright future of Malaysia's construction counters. First, surging oil prices put pressure on the bottom-line of the companies. Second, projects from that oil-rich nations will dampened the outlook with a slew of Malaysian companies venturing successfully into that region.

The Game still going on?

According to CIMB Research, the selling pressure on construction stocks is overdone as jobs in the Middle East account for 3 - 41% of the order books of WCT, IJM Corp, Gamuda and Muhibbah Engineering and the projects are mostly at the tail end with no payment issues so far. 

For instance, IJM only has 3% order book exposure while Muhibbah's balance of works at NDIA 

is backed by the Qatar government's push to complete the job by end-2011. WCT has a geographical advantage in Qatar which appears to be at the lowest risk of a political unrest. As for Gamuda, its Middle East exposure is minimal.

However, Finance Malaysia opine that the panic selling is understandable given the past experience of LCL Corp. Before the 2008 financial crisis, and also with high oil prices (just like right now), LCL has a bunch of projects in Middle East especially Dubai. All seems pretty well, until a sudden sharp drops in oil prices landed the oil-rich nation into huge budget deficit. Subsequently, LCL is facing cash flow problems which forced the company being delisted. A company with great potential go burst in few months. Of course, traders do take precautions now to avoid that same fate.

But, given the continuous ETP projects being rolled out by government this year, and also the "election factor", I think construction sector is very happening at least for another few months. Government: "The game must go on?"

Related Posts:

Potential Construction Projects Flow in 2011

2011 Malaysia Outlook: Sunshine to Sunset

10MP: Pretty, but no Sexy

Stock Watch: Benalec Holdings Bhd (5190)

Being one of the most successful new listing this year, Benalec is consistently closing higher than its IPO price of RM1.00. Listed on the main board of Bursa Malaysia, Benalec was categorized as a construction counter with more than RM1 billion market capitalization.

Company Info

• Incorporated since 1978
• Principally involved in the provision of marine construction services mainly in the area of land reclamation and dredging, rock revetment works, shore protection works, beach nourishment, marine piling, and construction of marine structures.
• Providing vessel chartering on time and voyage charters as well as tow-age services to third parties.
• Owning a full-service shipyard to carry out any ship repair, ship maintenance, shipbuilding or fabrication works.
• Owning a large and diversified fleet of 91 vessels

Expertise?

Benalec strength lies in their ability to operate a 1-stop centre offering Total Service and Complete In-House expertise, ranging from marine construction, marine transportation and support services, shipyard and shipbuilding, and vessels maintenance, refurbishment and modification and steel fabrication.

In 2010, Benalec achieved another key milestone when it expanded to Singapore and subsequently obtained ISO 9001:2008 and OHSAS 18001:2007.

Currently, Benalec is bidding for marine construction projects worth RM 5.7bn in Melaka, Penang, Selangor and Johor, and expects contracts to be awarded within 1-2 years time. Being an integrated marine construction specialist, Benalec enjoys healthy profit margins due to its ability to maintain cost efficiency in its marine construction projects. The company achieved a high core net profit margin averaging at about 20.3% over the past 3 years, excluding gain on disposal of land and vessels. (RHB Research)

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Cypark Resources Bhd

Potential Construction Projects Flow in 2011

During 4Q 2010, there were a series of positive news brought into construction sector. These news could possibly bring some cheers for local contractors during the "award ceremony" soon. To summarize it, let us examined and explored the news highlighted in 4Q 2010 for construction sector:-

OSK Research:

• KL Mass Rapid Transit, with the cabinet approving 1 of the 3 lines proposed, which will run from Sg Buloh to Kajang. It is said that the Government will set up an SPV to fund the RM36bn job via bonds and other capital market instruments. Tenders for the Sg Buloh-Kajang line will be open in April while construction will commence in July. Gamuda-MMC JV, which was recently appointed as Project Delivery Partner, to be the ultimate beneficiary of the MRT. The JV is only allowed to tender for the tunneling works estimated at RM14bn.
• Construction of the RM5bn Warisan Merdeka development is said to be slated to commence this year for implementation in 3 phases over 10 years. Amongst the local contractors, we think IJM is in the best position to participate in the tower portion given its track record with high-rise buildings in KL city center. Green building specialist Putrajaya Perdana could also benefit from the non-tower portions.
• A feasibility study is currently being conducted to evaluate the KL-Singapore High Speed Rail and will be concluded by mid-year, which cost RM10-12bn. Magnetic levitation technology was being proposed. OSK gather that YTL Corp has made proposals for several portions of the project.
• Brazail based Vale SA, the world's largest iron ore producer will invest RM467mil in Malaysia this year. The investment will involve the construction of a maritime terminal and distribution center to transport iron ore from Teluk Rubiah, Perak. We understand that Muhibbah Engineering is the only local contractor that has been pre-qualified for some of the packages.
• Bintulu Port has been invited by Sarawak government to submit a detailed proposal for the Samalaju Port. If implemented, we think Hock Seng Lee could win some packages given its marine engineering expertise.
• Malaysia and India have signed an MOU on technical assistance for road development which could enable Malaysian contractors to participate in the latter's projects. We see IJM as the clear winner from this MOU given its track record of building more than 1,400km of roads in India.
• During the Big 5 International Building and Construction Show in Abu Dhabi, it was reported that some more than USD23bn worth of construction contracts are ready to be awarded in the UAE. We view WCT as the ultimate beneficiary from contracts flow from the UAE given its past record in Abu Dhabi, Dubai and Qatar.