Malaysia Builders Lure CLSA as Stocks Lag by Most Since 2007

Malaysia's Prime Minister Najib Razak
Najib Razak, Malaysia's prime minister. Photographer: Sabine Albers/Bloomberg

Malaysian construction stocks are trailing regional peers by the most since 2007, a buy signal to CLSA Ltd. and Manulife Asset Management as the government’s $16 billion building plan sends profit estimates to a record.

While the Bursa Malaysia Construction Index climbed 6.7 percent this year through February, the gauge lagged behind the Bloomberg Asia Pacific Engineering & Construction Index by 12 percentage points, the most for any two-month period since October 2007. The Malaysian gauge has slipped 0.9 percent so far this month as the regional measure lost 2.8 percent.

Prime Minister Najib Razak’s government is selecting builders for a railway network and a new financial district in Kuala Lumpur, part of an infrastructure spending plan designed to boost economic growth. IJM Corp., Malaysia’s biggest builder by market value, and Ahmad Zaki Resources Bhd. won this year’s first contracts in January. Profits in the Malaysian construction index will climb 37 percent in the next 12 months, according to about 90 analyst projections compiled by Bloomberg.

“I’m quite bullish on the sector,” said Loong Chee Wei, a Kuala Lumpur-based analyst at CLSA, ranked No. 2 for Malaysia research last year by Institutional Investor magazine. “All the new contract wins will actually drive the upward re-rating of the stocks.”

Earnings in the Malaysia construction gauge may climb to 21.7 ringgit ($7.17) a share in 12 months, according to analysts’ forecasts, the highest level since Bloomberg began compiling the data in 2006. The index is valued at 13.2 times profit estimates, versus 12.4 times for the Bloomberg Asia Pacific gauge. The premium on Malaysian builders narrowed to 5.6 percent yesterday from 13 percent as of Dec. 30, the data show.

Biggest Project

The construction measure closed 0.8 percent higher in Kuala Lumpur, the most since Feb. 17 and its first gain in four days. The benchmark FTSE Bursa Malaysia KLCI Index added 0.2 percent.

IJM and Ahmad Zaki won contracts worth 1.74 billion ringgit to construct parts of the mass railway network in Kuala Lumpur on Jan. 27. The 156-kilometer (97-mile) railway, the country’s biggest infrastructure project, will carry 2 million passengers a day, with the first line scheduled for completion in 2016, according to the government.

State-owned Mass Rapid Transit Corp. is overseeing the 48 billion-ringgit railway system, which is being jointly managed by Gamuda Bhd., a Malaysian builder and property developer, and MMC Corp., which operates construction and power businesses.

“Given all the global uncertainties, you want to be in industries that have clarity in earnings, and the big winners have been stocks like IJM and Gamuda,” Jason Chong, who helps oversee about $1 billion at Manulife Asset’s Kuala Lumpur-based unit, said by phone on March 5. Chong declined to comment on his holdings.

Relative Value

IJM is valued at 17.5 times estimated 2012 earnings after the stock climbed 3.7 percent this year, according to the average of 21 analysts’ forecasts compiled by Bloomberg. Gamuda trades for 15.7 times projected profit and has gained 5.9 percent this year. Both companies are based in Petaling Jaya, near Kuala Lumpur.

MMC, based in Kuala Lumpur, has a multiple of 19.6 after climbing 1.8 percent in 2012. Ahmad Zaki, also based in the capital city, is valued at 10.1 times earnings and the stock has advanced 37 percent since the end of December, the second-biggest gain in the Malaysia construction index.

Building companies need project announcements to fuel stock gains, according to Bharat Joshi, who helps oversee $5 billion as an investment manager for Aberdeen Asset Management Plc in Kuala Lumpur.

“It’s a very news-driven sector,” Joshi said by phone on March 1. “People are buying ahead of the news, and then sell off and lock in profits.”

Financial District

Aberdeen holds shares of Tasek Corp., a Kuala Lumpur-based cement producer, which is valued at 11.3 times estimated 2012 earnings. That’s a 14 percent discount to the Malaysian construction gauge, according to data compiled by Bloomberg. Tasek shares have climbed 13 percent this year.

Analysts may boost earnings forecasts for Malaysian construction companies as the government awards new projects related to the 26 billion-ringgit Kuala Lumpur International Financial District, said CLSA’s Loong.

Construction is due to start in the first half of 2012, according to state-owned 1Malaysia Development Bhd., which is developing the financial district with an investment company owned by the Abu Dhabi government.

“There is room to upgrade earnings if new projects are rolled out,” Loong said.

The government will probably accelerate projects before elections that Prime Minister Najib must call by June 2013, according to Manulife’s Chong. Najib said in December that preparations had begun for the vote.

“With the elections around the corner, there’s a stronger likelihood that more of these contracts will be announced sooner rather than later,” Chong said. “For Malaysia, construction stocks will be the main focus this year.”

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