No Longer Sitting On The Sidelines: Beneficiaries Of The Construction Boom
• Local construction boom until 2030. In the White Paper on Population, the government estimates a population of 6.5m-6.9m by 2030. To support the population boom, the government has invested heavily in infrastructure development. For 2013, the Building and Construction Authority (BCA) projects a strong construction demand of S$26b-32b (5 year average: S$30b), of which about 53% will come from the public sector. For 2014 and 2015, public-sector construction demand is forecast to remain strong at S$11b-14b per year, vs total construction demand of S$20b-28b per year.
• 700,000 new homes. The government plans to build 700,000 new homes (a 58% increase from the current housing units) by 2030. The HDB has introduced 52,000 BTO flats in 2011 and 2012, and is expected to announce another 25,000 in 2013. Private residential supply is also expected to be high, with more than 16,000 units expected annually over the next three years.
• Double the railway network. Transport infrastructure is another key focus for the government. The Land Transport Authority (LTA) is targeting three new rail lines (Cross Island Line, Jurong Region Line and the Eastern Region Line), in addition to the Thomson Line (TSL) by 2030. Together with extensions to the Circle Line, North East Line and the Downtown Line, the rail network is expected to double from 178km currently to about 360km.
• Near-term catalyst: TSL tender awards. LTA has called for main tenders for fourteen TSL stations. With contract wins expected to be announced later in the year, our focus is the upcoming TSL.
• Auxiliary service providers are the main beneficiaries of the construction boom. Despite being direct beneficiaries of the construction boom, construction firms are threatened by rising labour costs and intense competition from foreign contractors. Auxiliary service providers, on the other hand, enjoy higher margins of up to 14.9% and have an established track record. Pan United, Kori Holdings and Yongnam are key beneficiaries.
• Pan United Corporation (PUC). Initiate coverage with a BUY and SOTP based target price of S$1.25. PUC is Singapore’s largest supplier of cement and ready-mixed concrete with a market share of 28%. With a quality product range and timely delivery guarantee, PUC has established an impressive track record, supplying RMC for the construction of both the Circle Line (CCL) and the Downtown Line (DTL). The company’s controlling interest in one of China’s top 10 river ports also provides a steady recurring alternative source of income that formed 15% of FY12 net profit. Positive earnings prospects, solid fundamentals (net cash) and a stable dividend payout make PUC one of our top picks for the sector.
• Kori Holdings (Kori). Initiate coverage with a BUY and target price of S$0.60, based on 5.5x 2014F PE. Through its strategic relationships with both foreign and local contractors, Kori has a stellar track record, securing contracts for all three stages of DTL. With Singapore looking to increasingly utilise its underground space, outlook for the underground specialist is set to remain upbeat. Even with a remarkable 72% rise in share price since its IPO last year, valuation remains undemanding at 4.6x 2013F PE, vs peers’ average of 8.8x, and is underpinned by a strong net cash of 14 cents/share (or 32.5% of market cap). We also like Kori for its strong cash flow and earnings that support its dividend payout ability. While the company does not have a dividend policy, we render a conservative 25% payout will offer an attractive dividend yield of 5.4%.
• Yongnam. Maintain BUY and target price of S$0.45, based on peers’ average PE of 9.7x on our 2014F EPS of 4.7 cents. Yongnam has more than 40 years of experience in steel fabrication and engineering solutions. The company has worked with numerous reputable contractors, such as Takenaka Corporation, Shimizu Corporationg Samsung Corporation and Ssangyong E&C. It was also involved in many major projects that changed the architectural landscape in Singapore. We like Yongnam for its undemanding valuation and a strong pipeline of projects.
• Sixth Mass Rapid Transit (MRT) line in Singapore. Thomson Line (TSL) is a 30km underground train line that will run through the north-south corridor of Singapore.
• Increased connectivity. Featuring 22 stations (which include six interchange stations - Woodlands, Caldecott, Stevens, Orchard, Outram Park and Marina Bay), TSL is linked to all existing lines and the DTL, significantly increasing the connectivity of Singapore. In addition, the new Woodlands North station is expected to connect with the future rapid transit link between Singapore and Malaysia, providing a seamless connection to JB Sentral and boosting businesses and tourism linkages between the two countries.
• Increased accessibility. When completed, TSL is expected to be within walking distance to 160,000 households (15% of total households), and will serve about 400,000 commuters daily.
• Reducing congestion. Passing through some of Singapore’s busiest stations and interchanges like Orchard and Outram Park, TSL is expected to ease congestion on other rail lines. TSL runs parallel to the existing North South Line (NSL), and may provide commuters in the area with an alternative travel route.
• Completion timeline. The TSL is due to commence operations progressively in three phases from 2019 to 2021.
• Contract details. Some 23 civil contracts are expected to be awarded for the TSL. As a result of tighter land constraints and difficult trade-offs that would affect land use and carry cost implications, LTA has tried to use as much state land (vacant land) and with as little acquisitions as possible. Only 13,000sqm of land have been acquired by the government to build TSL.
• Building challenges. Running through the north-south corridor of Singapore,TSL lies at the heart of Singapore. With the city area’s underground space already congested by existing MRT lines, buildings and utility lines, the TSL construction is likely to be challenging. Besides construction technical difficulty, construction cost remains a pressing concern. The budget for the DTL is estimated to have surged more than 70% from S$12b to S$20.7b, with half of the increase attributable to a sharp rise in construction costs. To tighten cost controls, LTA has invited more firms to bid for the projects, further increasing the competitive landscape of the local construction industry. While LTA has allocated a higher budget of S$18b for the TSL, construction technical difficulty and rising material and labour costs are likely to remain key concerns.
Cut & Cover Method
• There are two types of cut & cover methods – top-down and bottom-up.
• Top-down. Construction starts on the surface where a guide wall is built to mark the position of the retaining wall. A trench cutter is used to remove the soil, and reinforcement bar cages are installed and filled with concrete to form the panel walls. After the retaining walls are installed, soil beneath the roof slab of the underground tunnel is removed, and struts are installed to support the retaining walls. The surface opening will then be covered temporary to minimise traffic disruptions on the surface as construction continues underground. The roof slab is constructed to provide support across excavation and as a noise barrier. Next, levels of slabs are then constructed until the base slab is completed. Side walls are built upwards and the intermediate struts are removed. Finally, the soil is backfilled to the top strut level and the strut is removed. The surface area is reinstated. Bottom-up cut & cover is similar to the top-down method except the base slab is constructed first, followed by the intermediate slabs and finally the roof slab.
• When it is used. The cut & cover method is often used to construct shallow tunnels and underground stations. It is used in underpasses, approach sections to mined tunnels nearer to the ground and evacuation from the surface is plausible and economical. The 0.74km long tunnel north of Hougang station is constructed using the cut & cover method.
• Advantages. This method is more economical and practical than tunnel boring for shallow tunnels (10m-12m). It also provides more flexibility for changes in tunnel width as compared with tunnel boring, hence making it the preferred method for station construction.
• Disadvantages. As soil is removed from under the surface using a trencher, cut & cover will cause interference to traffic during construction. Construction is also expected to be longer than tunnel boring due to manual excavation.
• Tunnel boring is one of the most commonly used methods in metro tunnel construction.
• Tunnel boring machine (TBM). A construction staging area is set up for the launch shaft (a large hole in the ground) which will be excavated to allow the TBM to be lowered down. The TBM will commence drilling and finish at the other end of the tunnel (retrieval shaft). As the tunnel is drilled, it will be lined with precast concrete segment to form the tunnel. The excavated material (spoil) from the drilling will be transported and removed back through the shaft.
• When it is used. TBMs are often used to construct deep and long underground tunnels. One TBM can bore through a 1km long tunnel. Some 19 and 29 TBMs were used to construct DTL2 (16.6km) and DTL3 (21km) respectively.
• Advantages. Depending on the rotation speed of the cutterhead, a TBM is likely to result in faster and smoother excavation. Each TBM can move 1m-7m per day. In addition, as the TBM is driven underground, it causes fewer disturbances above ground.
Disadvantages. Tunnel boring is typically more expensive due to the higher capital costs of the TBM. Each TBM costs about S$20m. Extreme soil conditions (hard, abrasive rock) may result in higher wear and tear of the TBM’s cutterhead and this may impede the tunneling progress.
Using DTL3 as a reference, we project TSL’s contracts award timeline.
• Main contract awards to-date. LTA has announced tenders for 14 of TSL stations. With nine more contracts to go, we expect the remaining tender announcements to stagger until end-13/Jan14. Awards for successful tenders are estimated to be announced as early as Aug 13 to Jul 14, three to four months after the tenders’ closing dates.