News

• Partnership for HSR tender. GKent announced that it has entered into a Pre-Consortium Agreement with Siemens in relation to the KL-Singapore High Speed Rail (HSR) project. Under the agreement, GKent and Siemens will form an Engineering, Procurement and Construction (EPC) pre- consortium to bid for the development, financing, construction, technical operations and maintenance of the HSR, collectively termed as the “AssetsCo Tender”.

Comments

• Role of AssetsCo. To put it simplistically, our understanding is that AssetsCo will need to fund and build the systems portion (i.e. excludes civil works) of the HSR and rolling stock. We gather that the AssetsCo portion will comprise RM20bn of the overall RM60bn HSR cost. To get its returns on investment, we understand that AssetsCo will receive several payments which include availability payments, train lease fee, currency & indexation, energy strategy and based on other KPIs.
• Positive news flow. We are positive on this recent news as getting the AssetsCo role will further elevate GKent’s prominence in the rail system’s scene. Track record wise, GKent is undertaking the LRT extension systems, MRT2 track works and LRT3 PDP role. GKent’s huge net cash pile of RM395m will come in handy for the AssetsCo bid. Siemens will likely be the lead partner in the consortium for the AssetsCo bid and has significant global experience in rail jobs including rolling stock, automation systems and electrification. Should the consortium fail to win the AssetsCo tender, GKent can still potentially participate in the HSR systems work via subcontracts from the winner.
• Timeline ahead. MyHSR Corp and Singapore’s Land Transport Authority (LTA) held an international briefing in London last month to share more information on the AssetsCo tender which is expected to be called by year end. Construction of the HSR is scheduled to take place from 2018 to 2025 and operations to begin in 2026.

Risks

• Potential heavy capex to undertake the AssetsCo role.

Forecasts

• Unchanged as it is still too premature to factor any potential contribution from the HSR.

Rating

• Maintain BUY, TP: RM3.75
• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. We believe it is in a prime position to participate in upcoming mega rail projects such as the ECRL and HSR. It also boasts solid financials with above industry ROE of 24%, 3 year projected earnings CAGR of 12% and net cash position of RM0.70/share (22% of market cap).

Valuation

• Our SOP based TP of RM3.75 implies FY18-19 ex-cash P/E of 17x and 15.1x respectively.

Source: Hong Leong Investment Bank Research - 12 Oct 2017