KUALA LUMPUR (March 30): Kenanga Research has maintained its "overweight" rating of the building materials and construction sectors, naming OM Holdings Ltd, Engtex Group Bhd, Gamuda Bhd and Sunway Construction Group Bhd as its top picks.
In the building materials sector, the research house observed a positive outlook for non-ferrous metals due to lingering global supply constraints and increased demand stemming from China’s reopening.
However, Kenanga was less favourable for steel due to lethargic construction activity and the property market in China, according to a research note on Thursday (March 30).
“Domestically, we see potential in water piper makers, as the government is poised to accelerate the roll-out of water projects in both new water treatment plants and non-revenue water reduction initiatives,” it said.
It has “outperform” calls for OM Holdings, with a target price (TP) of RM2.95, and Engtex, with a TP of 75 sen.
The research house favours OM Holdings because of the group's structural cost advantage over international competitors, given its access to low-cost hydropower through a 20-year contract that ends in 2033, strong growth prospects underpinned by plans to expand capacity by 30% to 36% to 610,000-640,000 tonnes per year in the medium term, and the company's attractiveness to investors interested in clean energy sources.
Engtex is viewed favourably due to its huge potential in the local water pipe replacement market, dominant market position in both large diameter mild steel and ductile iron pipes, and strong earnings prospects underpinned by a sizeable order book and strong pipeline of new projects.
Turning to the construction sector, Kenanga expects a broader reassessment of the construction sector in the second quarter of 2023, ahead of the roll-out of more public infrastructure projects locally, particulary six fast-track flood mitigation projects mentioned in Budget 2023.
“Similarly, the flow of private-sector jobs is equally promising with plenty of fast-track semiconductor foundry and data centre building contracts up for grabs.
“Meanwhile, the operating condition has improved, with the return of foreign workers and easing [of the] cost of construction materials,” it stated.
Kenanga also has "outperform" calls for Gamuda, with a TP of RM5.15, and Sunway Construction, with a TP of RM2.13, given their sizeable order backlogs and strong chances of garnering a slice of action in the imminent RM45 billion Mass Rapid Transit 3 project, given their strong track records in mega rail projects in recent years.