Saturday, January 18, 2014

Strategy Outlook- Malaysia 2014 -CONSTRUCTION SECTOR -Vigorous Outlook (M&A)

Strategy Outlook- Malaysia 2014
CONSTRUCTION SECTOR
(Overweight)
“Vigorous Outlook”
Rail project expansion. We are positive on the long-term outlook for construction sector as the government is willing to spend RM160.0 billion on railway related projects until 2020 to improve the nation‟s public transportation system. The biggest chunk of railway project expansion may include
MRT 2 (RM25.0 billion),
MRT 3 (RM25.0 billion),
KL-Singapore High Speed Rail (RM30.0 billion) and
East Coast Rail Route (RM60.0 billion).


In line with this, we have an Overweight call on the sector with WCT (BUY; TP: RM2.78) as our top pick.

MRT2. The government is expected to grant the final approval of MRT2 and appointment of project delivery partner (PDP) by this year end. MRT2 is estimated to cost RM25.0 billion which is higher than MRT1 (RM22.2 billion) due to the longer distance and more stations to be developed (Refer Table 1). The tenders for MRT2 are expected to be called out in 1H14. We foresee that the prime beneficiary for MRT2 could be Gamuda (BUY, TP: RM5.29)-MMC which had previously secured a big portion of MRT1 contract worth RM8.3 billion for the underground works. The other potential beneficiary could be IJM Corp (BUY, TP: RM6.52), WCT (BUY, TP: RM2.78) and Sunway (Not Rated).

KL-Singapore High Speed Rail (HSR). China‟s President, Xi Jinping on his three day official visit to Malaysia (3rd-5th Oct 2013) has stated the interest to participate in Malaysia‟s railway, port and other connectivity projects including the 330km KL-Singapore high speed rail (HSR) project worth RM40 billion. According to the government sources, HSR project would consist of two services comprise of; i) an express city-to-city service and ii) a transit service. The express service will connect KL to Singapore directly while the transit service will stop at smaller towns such as Seremban, Ayer Keroh, Muar and Batu Pahat.

The HSR would cut the land travelling time between Malaysia and Singapore from 5 hours to just 90 minutes, in an ideal case scenario. Based on our cost/KM analysis, HSR project may cost approximately RM121 per KM which is 236% higher than Ipoh-Padang Besar double tracking project cost per KM (Table 3). This project is expected to attract several local and foreign firms to enter the bidding process and among the potential candidates are Gamuda-MMC, YTL Corp-Talgo or CAF, UEM Group-Ara Group-Talgo and Global Rail-Bombardier-China Railway Group.

We are not surprised on the Chinese government interest to participate in KL-Singapore HSR project given the fact that China has the longest HSR network in the world covering the distance of approximately 10,463KM, surpassing Spain (3,100KM) and Japan (2,664KM). China is also home to the world's longest single line, Beijing-Guangzhou HSR which covers the distance of 2,298 km. Note that China started its HSR operation in 2007 and able to enhance its HSR development in shorter time period compared to the Japan‟s infamous HSR network, Shinkansen, which commenced operation back in 1964.

ECRR. The government has also set up plans for the East Coast Rail Route (ECRR) estimated to cost around RM60.0 billion. ECRR coverage comprises of 620KM distance from KL-Mentakab-Kuantan-Kuala Terengganu-Kota Bharu and will be developed over 15 years. The tenders for phase 1 (Kerteh-Kuantan) of ECRR project are expected to be dished out somewhere in 2014, worth around RM2.0 billion. The Phase 1 will involve RM2.0 billion redevelopment of the 72KM Kerteh-Kuantan railway track owned by Petronas.

Rail double track upgrades in Klang Valley. There are also plans to upgrade the existing double track alignments with two potential projects comprise of; i) bypass rail of 110km line linking between Serendah and Port Klang and ii) upgrade works for the existing 150km track between Rawang and Seremban, and Port Klang and Sentul. Both projects are estimates to worth around RM5.0 billion. Meanwhile, Gemas-Johor Bahru double tracking project worth RM8.0 billion is also expected to be dished out somewhere in 2014. To recap, there are six double tracking project in Malaysia which cover the total distance of 963KM (refer table 5).

West Coast Expressway. West Coast Expressway (WCE) is one of the major projects which have been highlighted during the Budget 2014. The financial closure for WCE has been extended to January 2014 from October 2013 due to the additional information on the project requested by the Government. The project is valued at RM5.0 billion and the construction is expected to commence in 1H14. WCE will cover 316KM from Banting, Selangor to Taiping, Perak and linking to the existing highways including PLUS, SKVE, NKVE, LATAR and KESAS. We expect IJM Corp (BUY, TP: RM6.52) to be the main beneficiary as the group has a 23% stake in Kumpulan Europlus (KEuro), which owns 80% of the project owner, West Coast Expressway Sdn Bhd while the remaining 20% is held by IJM Corp. In addition, IJM is aiming to secure at least 70% (RM3.5 billion) of RM5.0 billion construction works.

Overweight on Construction. We have an Overweight call on construction sector underpinned by the robust long-term outlook via mega infrastructure projects which are strongly backed by the government and private sector. There are oasis of opportunities for players like Gamuda (BUY, TP: RM5.28), IJM Corp (BUY, TP: RM6.52), WCT (BUY, TP: RM2.78) to grab some goodies from the RM160.0 billion rail project expansion. These players orderbook could swell up until 2020 and hence, our conviction of an Overweight call.


Source/Extract/Excerpts/来源/转贴/摘录: M & A Securities
Publish date: 07/01/14

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