We understand that the government is committed to expedite projects such as Pan Borneo Highway Sabah (PBHS) and East Coast Rail Link (ECRL). Under Budget 2020, the government has allocated a substantial development expenditure of RM5b just to Sabah where about RM3b will be channelled for the PBHS portion from the central towards the east coast of Sabah. Construction is expected to kick off from 1Q20. For ECRL, we understand that a few specialised contractors (ie piling) have been invited by the turnkey contractor, China Communications Construction Company (CCCC), to send in quotations for horizontal packages along the Phase B alignment. We expect contract flows to intensify from mid-4Q19 and Gabungan AQRS (GAQRS) is likely to be the key beneficiary. We understand CCCC plans to start construction works for its packages (CCCC: 60%-content). Separately, we expect the signing of Bandar Malaysia (BM) to be concluded in due course as the IWH:CREC JV is finalising terms with the government.
We see opportunities in selected mid-cap counters which are key beneficiaries of mega infrastructure projects. Under the ex-project delivery partner (PDP) model post GE14, we opine contractors will bid for contracts competitively in terms of margins, hence giving an upper hand to mid-cap companies which operate efficiently and are Bumi-controlled. Top beneficiaries for PBHS and ECRL are GAQRS and MRCB. We reckon GAQRS’ share price has not factored in the potential job wins as it is currently trading at an undemanding 8.3x 2020F PE. We foresee GAQRS to secure new contracts worth RM1b by end-19 and approximately RM1.3b in 2020, while margins are expected to be on a par with its existing contracts as the company is operating efficiently.
Mega projects on a roll in 2019:
The outperformance of the KLCON Index vs the FBM KLCI ytd has been attributed to positive newsflow in the sector, beginning with the resumption of LRT3 at halve of its original cost to the original contractor MRCB:GKENT JV. The LRT3 progress billings are expected to gradually pick up from 2H19. In addition, the announcement for the recommencement of two shelved legacy projects – ECRL and Bandar Malaysia – in Apr 19 contributed to the performance of KLCON Index. Separately, the recent appointment of Minkonsult Sdn Bhd (as the technical advisory consultant) and Ernst & Young (as the commercial advisory consultant) to review the proposed changes to the Malaysia-Singapore high speed rail (HSR) and identify cost reductions for the Malaysian government. In Sarawak, contracts for projects such as the Coastal Road and Trunk Road (RM11b) and the Water Grid (RM3b) are expected to be progressively dished out in the run- up to the Sarawak state elections in 2021.
Pipeline of projects under Budget 2020:
Budget 2020 has shown the government will prioritise inclusive projects in important growth nodes to spur economic activities. This is seen in the substantial development expenditure allocated for Sabah and Sarawak worth RM5.2b and RM4.4b respectively. For Sabah, we understand the government was allocated up to RM3b and RM0.6b for the construction of PBHS and the 165km Trans Borneo Highway connecting Sabah-Sarawak-East Kalimantan (which cover the construction of a 40km highway stretch) and the Customs, Immigration, Quarantine and Security Complex. On the peninsular front, the Rapid Transit System has received the green light from the government for construction and further details are likely to be announced in six months.
Upholding sanctity of contracts:
The government has upheld the sanctity of contracts where it has re-awarded a few of the shelved projects, such as the Klang Valley Double Track Phase 2 (KVDT-2) to LTAT-Dhaya Maju, to the original contractors. Also, the toll takeover offer by MoF Inc was deemed fair by the acquired concessionaires as the management of the respective companies have accepted the offers.
We believe that it will improve, and investors should factor in option value from the re-activation of mega projects. Should the ECRL or PBHS commence construction and begin to award fresh contracts, this would spark a mild re-rating for the sector, particularly for turnkey contractors and sub-contractors. The resumption of the almost RM47b Penang Transport Masterplan and the HSR project would provide further upside to the sector.
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but Fides Assets makes no representation and accepts no responsibility or liability as to its completeness or accuracy.