20140404-Maybank_KERPL-A_falling_star__Initiate_Underweight_32页_994kb

Thai Construction Sector Summary

Core Content

The Thai construction sector is currently underperforming, with the analyst initiating a contrarian Underweight rating. The sector is expected to struggle in the short term due to a lack of significant public and private investments, which are the primary catalysts for growth. The analyst also highlights the limited upside potential for share prices and advises against accumulating stocks during the current correction.

Main Points

• Sector Performance: The construction sector is expected to underperform the SET index. Earnings growth is projected at 2.6% for FY14, significantly lower than the market's 15%.
• Catalyst Shortage: No major infrastructure projects are expected to open for bidding in 2014 due to political uncertainty. The THB2t infrastructure bill was ruled unconstitutional, and the THB350b WRMP is also delayed.
• Orderbook Situation: The sector's orderbook cover is low by historical standards. Most of the revenue for FY14 is already secured, but profit growth from existing projects is expected to be weak.
• Stock Ratings:
  • CH. Karnchang (CK): Top BUY with a target price (TP) of THB21. The company is expected to generate work from its associated companies.
  • Sino-Thai E&C (STEC): Top SELL with a TP of THB14. It is the most vulnerable due to a limited backlog (only two years’ worth of work).
  • Italian-Thai Development (ITD): Top SELL with a TP of THB3.0. The company's high leverage and potential for capital raising could cap its share price.
• Dividend and Beta: All stocks have low dividend yields (0%–2.4%) and high betas (average of 1.7), making them sensitive to market movements.
• Earnings and Revenue: FY14 revenue is expected to be intact due to the existing backlog, but profit growth is anemic. The analyst does not expect capital gains and believes the sector lacks re-rating catalysts.
• Construction Costs: Raw material prices (steel and cement) account for about 50% of total construction costs. While cement prices are expected to rise moderately, steel prices are likely to remain stable due to oil prices.
• Political Uncertainty: The absence of a functional government has stalled public investment. The political situation is a key factor affecting the sector's performance.
• Risk Factors:
  • Cost Overruns: A global economic recovery could lead to higher material costs, impacting gross margins.
  • Political Improvements: If the political situation improves faster than expected, the sector could see a stronger rebound.
• Orderbook Analysis:
  • STEC has the highest proportion of government projects (60%) and is most vulnerable to delayed payments.
  • ITD has the largest overseas orderbook (68%), which is considered unsecured due to regulatory uncertainty.
  • CK has a more diversified orderbook, with 44% from overseas projects through its associated companies.

Key Information

• Valuation Highlights:

  • CK: Mkt Cap THB875m, BUY, TP THB21, P/E 28.3x (14E), P/B 1.7x (14E), Dividend Yield 1.4%.
  • STEC: Mkt Cap THB826m, SELL, TP THB14, P/E 16.7x (14E), P/B 3.2x (14E), Dividend Yield 2.4%.
  • ITD: Mkt Cap THB551m, SELL, TP THB3.0, P/E 22.8x (14E), P/B 1.4x (14E), Dividend Yield NA.

• Infrastructure Projects:

  • The THB350b WRMP is delayed due to environmental concerns and lack of public hearings.
  • The THB2t infrastructure bill was ruled unconstitutional, pushing projects back to the annual budget process.
  • The high-speed train and mass transit projects are key long-term growth drivers, but their implementation is uncertain due to political instability.

• Private Investment Outlook: Private investment is expected to slow in 2014 due to a weak economic outlook and downward revisions to GDP growth forecasts.

Investment Thesis

• Underweight on the sector due to:
  • No visible catalysts in the next 12 months.
  • Weak earnings growth (2.6% vs market's 15%).
  • Low dividend yields and high beta.
  • Potential margin pressure due to increased competition and low backlog.
• Recommendation:
  • BUY: CK due to its ability to generate work from associated companies.
  • SELL: STEC and ITD due to vulnerability and potential capital raising needs.

Risks

• Cost Overruns: Rising material prices could impact profitability.
• Political Improvements: Faster political resolution may lead to a stronger rebound in share prices.
• Orderbook Uncertainty: Delayed payments and unsecured overseas projects could negatively affect cash flow.

Analyst

• Kittisorn Pruitipat, CFA, FRM
• Contact: (66) 2658 6300 ext 1395
• Email: kittisorn.p@maybank-ke.co.th

Summary of Key Metrics

Figures and Charts

• Historical Chart: Construction Sector
• PBV Band for STEC, CK, ITD: Shows valuation trends
• Orderbook Decline in 2014: Highlights the reduction in backlog for STEC, CK, and ITD
• Breakdown of Construction Costs: Steel and cement are the largest cost components
• Gross Margin Stability: Expected to remain flat in FY14
• Infrastructure Investment Breakdown: 80% allocated to rail improvement, 9% to road transportation, 5% to motorways, 3% to other projects
• Net Debt-to-Equity Ratio: Varies across firms, with STEC at net cash, CK at 2.5x, and ITD at 3.1x as of end-2013

Conclusion

The Thai construction sector faces significant headwinds in 2014, primarily due to political uncertainty and a lack of investment catalysts. While CK has a stronger position due to its associated companies, the overall sector is expected to underperform. Investors are advised to avoid accumulating shares due to the weak capital gains outlook and low dividend yields. The analyst emphasizes that the sector is unattractive at current valuations and lacks the momentum to support share price appreciation.