Contractors

Contractors

Mega-projects still on the rails

-Mega-projects still moving on schedule, with water project bids settled
-Better 1Q13 core profit for all leading contractors
-Myanmar’s opening and AEC from 2015 to benefit Thailand’s contractors
-We “Overweight” contractors with CK as our top pick. 

1Q13 earnings recap – all leading contractor earnings improved. In 1Q13, core profit for contractor stocks in our coverage (ITD, CK, STEC and NWR) grew. 1Q13 core profit reports showed improvement for ITD to Bt195mn (net margin of 2.0%); CK’s core profit was Bt320mn (net margin 4.0%); STEC’s was Bt403mn with net margin of 5.6% and NWR’s was Bt55mn with net margin of 3.9%. This suggests contractors are heading for an uptrend this year. With more large projects coming up and no new players able to take them on, we expect the market to tighten, easing competition and allowing better profits and margins.
Government megaprojects boosting backlog. We expect a large amount of jobs to start flowing from this year, beginning with the water and flood management project (2013-2017). Also providing work will be the government’s Bt2trn infrastructure plans spanning 2013-2020 and finally the Dawei project in Myanmar will be providing jobs for the next 16 years. On June 11, bids were opened for the water and flood management project, with ITD and LOXLEY winning their bids (see figure on next page).
Myanmar opening, AEC coming - vast room for jobs — Myanmar has been closed for many years while its neighbors were building up infrastructure. To catch up it will need to start building – and as a neighbor, Thailand is well positioned to get in on the jobs. Then in 2015 the AEC will come into being, also offering jobs to the sector. We continue to see 2013-2015 as the sector’s golden years.
Bt2trn still on the tracks. An E-auction for the government’s Bt2trn in infrastructure projects is expected in 3Q13. This opens the door to much backlog for construction companies, especially the three main contractors, CK, ITD, and STEC.
MRT lines coming first. In the Bt2trn government infrastructure budget, the primary focus initially will be on adding ten new light rail lines, with these taking 39% of the total value or Bt472bn. The State Railway of Thailand (SRT) will operate three: the Dark and Light Red Lines plus the Airport Link. The Mass Rapid Transit Authority of Thailand (MRTA) will operate the other seven: Purple, Blue, Dark Green, Light Green, Orange, Pink and Yellow Lines. Some portions of the Red, Purple and Blue Lines are already under construction, but bids for most will be opened in 2013-2014, with operations planned for 2014-2022. The final route is the Yellow Line, scheduled to finish in 2022. ITD, CK, STEC and NWR all have the potential to add portions of these to their backlog.
Existing and new backlog will grow revenue. STEC’s backlog stands at Bt80bn, CK’s at Bt144bn, NWR’s at Bt18bn and CNT’s at Bt16bn. ITD’s was recently boosted to Bt355bn from Bt218bn by the win of five modules of the water management project. All are ready to bid for the new projects initiated by the government.  
“Overweight” contractors with CK as our top pick. We estimate annual growth of 7-9% over the next seven years, in line with the growth in public and private sector projects, though the sector may continue to be dogged by concerns of delays in public investment projects. CK and STEC will get the most of the new light rail contracts. CK and ITD have a good chance of getting infrastructure contracts in Laos and Myanmar.