News

• Sabah PBH kicks off. Yesterday, the PDP agreement for the Sabah portion of the Pan Borneo Highway (PBH) was signed which saw the appointment of Borneo Highway PDP. The PDP is 60% owned by privately held Warisan Tarang Construction, 20% by UEM Group (not listed) and 20% by MMC Corp (not rated).

• Project details. The RM12.8bn Sabah PBH spans 706km from Sindumin (one of the towns within the Brunei Bay) to Tawau. It involves upgrading existing passageways as well as the construction of new roads to link the towns involved.

Comments

• Major contracts next year. Judging from the experience of the Sarawak PBH, it roughly took a year between the appointment of the PDP (March 2015) and awarding of the first major work package (March 2016). If this similar timeline is applied, we should then expect contract awards for the Sabah PBH to be dished out starting April 2017. Between now to then, the PDP will be appointing consultants for the studies, finalise technical aspects and decide on the number of work packages.

• Initial packages possibly earlier. The Sarawak PBH saw 2 initial packages being rolled out prior to the main contracts. This too could be the case for the Sabah portion with an initial package from Papar to Donggongon (11.7km). Previous media reports have highlighted 2 other potential initial packages which are from Tawau to Semporna and the Lahad Datu bypass. Stock Impact

• MMC the obviou s winner… and is the only listed name with exposure to the PDP role. It can leverage on its track record as PDP for the MRT1 and MRT2.

• Lacking Sabah contractors. The Sabah State Govt has requested that local “Sabahan” contractors be gi ven a participating role in the job. This is akin to the Sarawak PBH where “Sarawakian” cont ractors must hold a 70% stake i n the bidding consortium. However, to our best of knowledge, there are no listed Sabah based contractors. Peninsular based cont ractors that are relatively active in Sabah include WCT (BUY, TP: RM2.15), Bina Puri (not rated) and TRC Synergy (not rated).

• Parental benefits for Edgenta? Edgenta (BUY, TP: RM4.32) is a 69% subsidiary of UEM Group which has a 20% stake in the PDP. As such, Edgenta could benefit from contract flows from its parent-co potentially involving (i ) consultancy services via Opus and (ii) road pavement works via PROPEL.

Risks

• Delay or cancellation risk is minimal as the Sabah portion of the PBH compliments the ongoing Sarawak stretch. Top Picks Maintain OVERWEIGHT
• Stay OVERWEIGHT on construction as 2016 will undoubtedly be a record year for contracts. Implementation of the Sabah PBH will sustain job flows into 2017.

Source: Hong Leong Investment Bank Research - 12 Apr 2016