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- Invest in Construction – Don’t miss the train
Invest in Construction - Don't miss the train
Rating:
Loading...We have double upgraded our rating on the Construction sector to OVERWEIGHT from UNDERWEIGHT as we believe now is the time to take a position in contractors’ stocks ahead of big-ticket government project biddings in 2H18. Contractors’ valuations are still undemanding despite a recent rally. They are trading just at their long-term average PBV, while we think that in this environment they should trade 0.5-1SD above the long-term mean. Our top BUY is STEC.
Learn from history
Contractor stocks seem to trade mostly on news flows rather than fundamentals. We have seen the sector re-rated and de-rated several times since 2002. During 2002-2012, the re-ratings were mainly due to government announcements of mega projects and to political stability, but since 2013 the market seems to have been looking for more realistic drivers. Only clear bidding schedules with limited execution risk have led to re-ratings, while de-ratings came on project delays, policy changes, political turmoil and construction material price hikes. We have created a weighted index of CK and STEC to chart how these stocks rerate and de-rate in response to these events, as seen in Figure 1.
New bidding cycle is about to begin The resumption of government project biddings (which disappeared after being placed under legal review when the new Procurement Act went into effect in late August 2017) should cause a multiple re-rating this time. As shown in Figure 2, biddings for projects worth around Bt780bn are scheduled to take place in 2H18. This huge amount should improve contractors’ earnings visibility and put the Construction sector on investors’ radar again.
Deserving to trade at 0.5-1SD above long-term PBV average
The improved industry outlook should bring about a re-rating of contractors to 0.5-1SD above the long-term PBV mean, as it has in the past. We believe STEC deserves to trade at a higher multiple than CK as STEC is a pure construction play and has clearer earnings visibility. The current backlog should enable STEC to deliver a 3-year revenue CAGR of 30% without adding new projects, while CK revenue would fall if it cannot secure more projects to add to its backlog. Therefore, we have pegged STEC’s and CK’s YE18 target prices to 0.75SD and 0.5SD, respectively, above their long-term means. STEC’s and CK’s target prices are Bt26 and Bt29.5, respectively.
Exit strategy
As the sector is highly cyclical, we don’t recommend holding for long. We prefer to exit in late 4Q18. We believe that should be the peak of the cycle, as the last biddings of 2018 will have taken place by that time. Government tenders may be placed on hold again from early 2019 to around six months after the general elections, expected in 1H19.
Trader Aleksandar Kumanov Read more:
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