Risk reward turning positive
We upgrade our stance on the Malaysian construction sector to
positive from neutral. The core investment thesis for our more
bullish view is that we expect the government’s pump priming
efforts to accelerate in 2009 as we approach the tail end of the
9MP whilst also ensuring its GDP growth target of 3.5% is met.
At current levels, our construction universe is trading at
discounts to 1998 average levels even on our lowered earnings,
reiterating our view that the risk reward ratio for construction
equities has turned positive. Top pick is IJM.
Construction to the rescue
In our view, the government will feel the necessity to pump
prime in the coming months as consumer spending wanes and
other industries falter. Construction typically forms some 3-4%
of total GDP but the multiplier effect on the economy is great.
53% of the total RM230bn from the 9MP has yet to be spent,
implying another RM61bn each year for two years. The
government has also committed a development expenditure of
RM53bn vs RM48bn in 2008. Based on our round of company
visits, we understand the government has been calling for
meetings with contractors on the likelihood of dishing out
relevant projects worth up to RM40bn.
Lower material costs = Lower execution risk and VOs
We also expect the more conducive cost environment now to
trigger more contract flows in 2009. Logically, this would make
perfect sense as it would imply that project values can be more
conservative and need not factor in higher cost of raw
materials. This would in turn ensure that lower amount of
variation orders will be submitted and sharply reduce execution
risks, given that cost stability is ensured as project cashflows can
be more easily determined. We also envisage that developers
who have sold buildings off the plan will take advantage of the
low cost environment to call for tenders. We expect meaningful
margin recovery in 2QCY09 from the trough of 2.6% in 3CY08
as legacy orderbooks are exhausted.
Valuation discount to 1998 average, fundamentals are not
On average, our core construction universe is trading at 10.7x
CY09 PE and 0.96x P/NTA which is at a discount to 1998
average levels of 11.9x PE and 1.3x P/NTA. Fundamentals of our
local contractors are arguably stronger vs 1998 and have moved
up the value chain with their presence in India and Middle East.
Orderbook are also at record levels. We think muted consensus
earnings which have been cut by 18-46% since the beginning
of 2008, imply modest orderbook replenishments and low
margin assumptions. Hence, positive newsflow on contract wins
will fuel upgrades and a rerating in the sector. We like IJM
which is expected to be a prime beneficiary of government
pump priming given the flight to quality contractors. Our other
smaller cap Buys are MRCB and Sunway.

Table of Contents
Outlook for 2009 3
Key Drivers:
A : Pump priming efforts to save the economy 3
B : Meaningful margin recovery to underpin
profitability 7
C: Separating the men from the boys 8
D : Valuations at 1998 lows, fundamentals are not 9
Financials 11
Consensus Earnings 16
Foreign shareholding 17
Stress testing earnings vulnerability 18
Key Risks 21
Strategy and Stock Picks 21