According to Business Times, the RM1bn intra-city rail line for Iskandar Malaysia in Johor as proposed by Malaysia Steel Works (Masteel) since 2009 may not be receiving the blessing from the Transport Ministry and Minister of Finance. Nevertheless, we are unperturbed by the failure of running this project as we are less keen on this project, which could potentially weaken its balance sheet in the short-term. No change to our earnings projection as we have not factored in any earnings contribution from this project. We maintain our Outperform call on Masteel with an unchanged TP of RM1.36.

To recap. Partnering with KUB, the joint venture company has recently been considered a RM1bn rail transit network project in Iskandar Malaysia. Under the 60:40 JV Metropolitan Commuter Network S/B (MCN), it will build and operate a 100km intra-city commuter CRN system in Iskandar Malaysia to Woodlands, Singapore. It will use Keretapi Tanah Melayu‟s (KTM) existing railway track and land reserves. There will be up to 21 commuter stations in the Iskandar Malaysia region. The concession to operate the train service will be for 37 years and the group aims to breakeven after 12 or 13 years of operations. The JV company will fork out RM300m to buy 15 trains and it will also receive a 20-year RM700m soft loan from government to construct the facilities, which will take about 3 years.

Reasons. The source said that the proposal was not approved by the Transport Ministry and Minister of Finance as the government wants to focus on the high-speed rail system linking Kuala Lumpur and Singapore, which will likely have a stop in Iskandar Malaysia and the Rapid Transit System from Johor Bharu to Woodlands.

Maintaining outperform call. We are retaining our call on Masteel with an outperform rating and target price of RM1.36 based on a conservative 10x FY14 diluted EPS, which implies a 38.7% potential upside.

Source: PublicInvest Research - 26 Aug 2013