[KUALA LUMPUR] With as much as 200 billion ringgit (S$68.92 billion) of building jobs in play, Danny Wong Teck Meng says no investor can afford to ignore Malaysian construction stocks.
The fund manager whose Areca EquityTrust Fund beat 98 per cent of peers over the past three years with a 13 per cent return, has been buying builders as the government accelerates infrastructure spending across Malaysia. The latest hotspot is Sarawak on Borneo island where a 28.9 billion ringgit, 1,796-kilometre toll-free highway linking the state and Sabah is being built before a crucial state election in May.
"The construction industry will be very exciting as these jobs are expected to be awarded in the next two years. There could be as much as 200 billion ringgit of jobs out there," said Mr Wong, the chief executive officer of Areca Capital Sdn Bhd, who correctly predicted this year's slump in technology shares and a rebound in energy companies.
"We can't ignore them. Sarawak stocks are in focus because of the Pan Borneo highway and also the election, where there are bound to be goodies."
Construction companies are trading at the highest level relative to the Malaysian equity benchmark in four years as a building boom takes hold. With an estimated 136 billion ringgit of jobs in the pipeline in 2016 alone, a CIMB Group Holdings Bhd report predicts more gains as share prices haven't fully priced in the earnings potential.
The awards bonanza from rail to roads also comes amid an "election play" on some contractors as Prime Minister Najib Razak's ruling Barisan Nasional coalition bids to retain Sarawak - a state held since 1963 - in polls May 7.
The Bursa Malaysia Construction Index has risen 21 per cent from an August low and is priced at 1.2 times net assets, near the most expensive level in almost a year. It's up 3.2 per cent in 2016, beating the FTSE Bursa Malaysia KLCI Index that's fallen 0.6 per cent.
The biggest gainers in the building gauge this year are Ekovest Bhd and Kimlun Corp which have jumped at least 28 per cent. The building gauge rose 0.1 per cent on Thursday, its second day of increases.
Areca's Mr Wong owns shares of Gamuda Bhd, the biggest builder by market value, Sunway Construction Bhd, Mitrajaya Holdings Bhd and Econpile Holdings Bhd.
He sold Kimlun because of its out-performance, as well as some Sarawak stocks.
Under the 11th Malaysia Plan, the government will set aside 260 billion ringgit for development expenditure from 2016 to 2020, the culmination of a strategy to achieve high-income status. Other projects being planned include the Kuala Lumpur-Singapore high-speed line and subway extensions around the capital.
Major jobs totaling 24 billion ringgit were handed out in the first quarter, a good gauge of what's in store for the rest of 2016, Sharizan Rosely, a Kuala Lumpur-based analyst at CIMB, who has an overweight rating on the industry, wrote in a report earlier this month.
"The construction sector is set for a new boom phase for civil and infrastructure works in 2016," he said. This year "marks a big comeback of jobs for the sector as it is the first year of implementation of the 11th Malaysia Plan, with major high-multiplier and larger-value projects shifting to the long awaited award phase."
With the Sarawak polls drawing near, the rollout of more infrastructure jobs is expected to benefit Gamuda and IJM Corp, while rivals based in the state including Hock Seng Lee Bhd, Naim Holdings Bhd, Zecon Bhd and Cahya Mata Sarawak Bhd are potential winners, according to a JPMorgan Chase & Co report.
"Sarawak construction companies are natural beneficiaries given the requirement for 70 per cent local participation," Mak Hoy Kit, a Kuala Lumpur-based analyst at JPMorgan, wrote in the report.
Hock Seng Lee, Sarawak's largest builder, has surged 15 per cent from its August low, while Zecon Bhd has rallied 33 per cent from the lowest level in September. Mr Najib touted development of Sarawak and neighboring Sabah in October, pledging funds for paddy fertilizers, longhouses and the Pan Borneo road project.
Sarawak played a crucial role in helping the ruling Barisan Nasional coalition retain power, with 25 of 133 parliamentary seats. It won 133 of 222 seats at the 2013 general election.
While construction stocks will continue to be in favor as job flows remain buoyant, prices could retreat before another rally happens, according to Tan Ming Han, Kuala Lumpur-based senior investment manager of Amundi Malaysia.
"There should be some profit-taking until construction companies book these contracts into profits," said Mr Tan, whose KAF Vision Fund returned 20 per cent over the past three years, beating 95 per cent of its peers. "News of these contract win have been built into the share prices." Even after the rally by builders, Areca's Mr Wong still owns some Sarawak stocks, saying there are still opportunities in construction companies.
"Big caps are not cheap, but they have the potential to clinch very big jobs."