Contractors

Bell sounding for government action

Contractors

Contractors have outperformed significantly in 2H12 as the government

lines up infrastructure projects it plans to implement

1H13 promises: Green Line mass transit and double track railway

Implementation needed to support further re-rating

STEC remains our favorite, followed by CK

Gov't needs to kick start bidding processes. The government has outlined many of

the projects it plans to implement, especially those under the Bt350bn budget for

flood prevention and Bt2.2tn in infrastructure. Latest news reports say the

government will sell bidding documents for the Green Line in 1Q13. The state

enterprise overseeing this project is now asking the cabinet to approve a higher

budget since it plans to extend the line by 7.5km, raising project value by 65% to

Bt60bn. An E-auction is also scheduled for three double track railway routes in 1H13 for

a total value of Bt40bn.

Existing backlog secures an average 83% of 2013 revenue. As of end-3Q12, STEC's

backlog was Bt42bn, CK's Bt127bn and ITD's Bt137bn. YTD, STEC signed new projects

worth Bt7.4bn (with Red Line Contract 1 worth Bt18bn awaiting cabinet approval); CK

and ITD signed new contracts worth Bt99bn and Bt47bn respectively. Based on 2012F

backlog, we expect STEC's revenue to grow 19% in 2013 (current backlog secures 85% of

our revenue forecast). We forecast CK's revenue to grow 46% (87percent secured) and ITD's

by 25% (78percent secured).

Earnings revision after 3Q12 results: Raise STEC, lower CK and ITD. We earlier

raised STEC's 2012F profit by 7% to reflect higher revenue while lowering CK's 2012 core

profit forecast to Bt200mn from earlier Bt497mn on a lower gross margin in 3Q12 than

expected. After reviewing our forecast for ITD, we are revising down its 2012-14F profit

by 19-17% to factor in higher SGA. In 2012, STEC is on track to post a record high

profit while CK will turn up to a core profit after last year's core loss. We look for a

turnaround for ITD as well, but its bottom line will still be in the red, pressured mainly

by provisions and forex loss.

4Q12 results in mid-Feb: STEC could still surprise. We forecast STEC core profit of

Bt227mn, -5% YoY and 26% QoQ - we factored in higher SGA and this brings it in line

with consensus. If STEC is able to maintain the high revenue recognition seen in 3Q12,

then we are looking for 10% upside. For CK, we expect core profit of Bt76mn, +43%

QoQ, as construction work picks up on new projects. For ITD we expect core profit to

improve slightly QoQ to Bt81mn.

Contractor stocks could continue to outperform significantly. Since June, STEC

has shot up 88% vs. CK's +34% and ITD's +20% and the SET's +16%. We believe this is in

response to positive news flow as the government begins to prioritize infrastructure

projects. STEC is now trading on P/BV 2013F of 4.6x with CK at 2.3x and ITD at 1.9x. This

compares to the P/BV range of 3-6x that contractors traded at when governments

sped up large projects in the past. We believe CK and ITD have underperformed STEC

due to their high gearing and uncertainty over big projects (CK's Xayaburi and ITD's

Dawei). If the government kicks off bidding in 1H13 - as it has promised - then

contractor stocks could rally further. Our new end-2013 TP for ITD is Bt4.2/sh.

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