Construction Services

Construction Services

Good news: Infrastructure and water projects back. The National Council for Peace and Order (NCPO) plans to fast-track some projects under the Bt350bn flood prevention program and Bt2trn infrastructure bill. The projects will be chosen on the basis of need. This is a breath of fresh air for contractors after several years of stagnation. The potential for revival of already awarded projects and awarding of new ones is positive for contractors CK, STEC, ITD and NWR. At the same time, the projects must be approached differently since both big plans had been nullified by the courts. Implementation may be a challenge, but sentiment is still more positive.
First off: MRT and double tracks. We exclude the high-speed trains, ports and traffic de-bottle necking projects from our analysis but include the MRT lines (Green, Pink, Orange and Yellow) and the state railway’s double-track projects. We caution that reviews of the projects may change them. The exception is the Green Line, which had already received the cabinet’s okay; this will, however, be delayed 105 days from mid-May 2014. We expect the Bt2trn to be cut in half and placed under the annual fiscal budget. This means the next government will have to continue funding these large projects via normal budgetary channels. By law, this cannot exceed Bt200bn per year based on a budget deficit of no more than 20% of the annual budget of ~Bt2.6trn. We estimate only 60-70% of this or Bt105-150bn will be spent on infrastructure.
2014 investment delayed to September. We expect Bt86bn in projects to be put up for bidding this year. This includes civil work valued at Bt26bn for the Green Line (Mor Chit-Ku Kod); bidding was postponed 105 days from mid-May to September 2014. The plans by the State Railway of Thailand (SRT) to open bids for dual-tracking of the Chachoengsao-Klong 19-Kaeng Khoi route via E-action (immediate results) will now take place around September 2014. Bidding for Phase 2 of Suvarnabhumi Airport, with civil work valued at Bt48bn, is expected to open before the end of FY2014 (September). The EIA’s for other MRT lines (Pink, Orange and Yellow) are likely to be reviewed.
Expect 2015 public jobs of Bt105-150bn. In addition to the route noted above, the SRT has five other routes (Fig. 6) it wants to double-track for a total of 767kms and value of Bt105-150bn. It plans to open bids for all five in 2015. EIAs for all are underway. 
Backlog at home and abroad. Contractors have been accumulating backlog within Asia, especially ASEAN. ITD has the largest at Bt323bn (including Mozambique and Myanmar mining projects); CK has Bt112bn and STEC has Bt51bn. There is still a shortage of contractors in the private sector in the ASEAN region, giving bargaining power to these larger contractors, all of whom are well prepared to bid for more jobs. 
Revaluation but stay Neutral on all: Contractors can breathe more freely now that some progress will be made on these large projects. This will reduce the battles over jobs and thus preserve margins. However, the market has already begun to price this in and CK, ITD and STEC are all trading above TPs. We adjust to average PER+1S.D. at 23.6x for STEC, giving a TP of Bt24 and use CK’s average PER +1S.D. of 24.5x, giving a TP of Bt23. We rate STEC higher on expectation of better earnings in 2014, though CK will surge from 2016 as BMCL turns profitable. For ITD, with the highest backlog, we focus on its Mozambique projects and value it at Bt5.5 based on 2.0x PBV.