PM Tun Mahathir announced that East Coast Rail Link (ECRL) (RM60bn), multi product pipeline in Malacca and Trans-Sabah Gas pipeline projects will be cancelled for now and final compensation sum will be negotiated soon. We are not surprise with this news as we reckon that revival of mega infrastructure projects is unlikely in the near term. IJM will be negatively affected due to reduced throughput of Kuantan Port in the long run. Nonetheless we maintain our earnings forecast and valuation for IJM as we do not factor in incremental contribution from ECRL into our model. Maintain NEUTRAL on construction post changes in federal government and scrapping of mega rail projects. The domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in the near term.

NEWSBREAK

PM Tun Mahathir announced that East Coast Rail Link (ECRL) (RM60bn), multi product pipeline in Malacca and Trans-Sabah Gas pipeline projects will be cancelled for now and final compensation sum will be negotiated soon. These projects have been suspended since last month after being discovered that the project costs have bloated to unjustified levels.

HLIB’s VIEW

Within expectations. The news of cancellation of ECRL is not a surprise to us as we mentioned before that revival of the mega infrastructure projects such as ECRL and HSR (RM60-70bn) in the near term is unlikely given new government focus on reducing national debt.

Impact to listed work contractors. About RM18-24bn of potential contracts will be removed as 30-40% of ECRL jobs were expected to be taken up by local contractors. Listed companies that have received work packages are HSS Engineers that has c.RM100m unbilled contract related to ECRL and Gabungan AQRS which was seen as top contender for ECRL work packages will also be negatively affected.

Kuantan Port. In the long run, throughput of Kuantan Port may be impacted as ECRL is expected to facilitate cargo from China to Port Klang. 53m tonnes of cargo will use ECRL annually by 2030 based on estimation by the previous administration. Kuantan port contributed c.4% to IJM FY18 revenue and c.11% to IJM’s SOP valuation. Nonetheless, incremental contribution from ECRL is beyond our earnings forecast horizon as the project is only expected to complete by 2024. Besides, we assume no throughput growth in our valuation on Kuantan port and hence cancellation of ECRL has no impact to our valuation.

Earnings and valuation. Maintained earnings forecast for IJM as we do not factor in any incremental contribution from ECRL. Maintain BUY with unchanged SOP driven TP of RM2.23.

Maintain NEUTRAL. Maintain NEUTRAL on construction post changes in federal government and scrapping of mega rail projects. The domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in the near term. Nonetheless, high orderbook levels (average cover ratio of 4.9x) following the robust job flows in the past 2 years should help sustain construction earnings amid subdued near term industry prospects.

Source: Hong Leong Investment Bank Research - 23 Aug 2018