KL-SG HSR was jointly terminated by Malaysian and Singaporean governments. The decision was made after both governments were unable to reach common ground post-revision in project terms. Despite the cancellation, HSR is not necessarily shelved with possibility of a link to JB instead. Nonetheless, implementation of a domestic HSR should take place over the longer term. We look to the 12MP for further hints on the fate of a domestic HSR. Maintain NEUTRAL. Top picks are IJM (TP: RM1.99) and SunCon (TP: RM2.11).

NEWSBREAK

Link to SG cancelled. Both Malaysian and Singaporean governments announced that the KL-SG High Speed Rail (HSR) will be cancelled resulting from inability to reach a mutual agreement on its terms. As such, Malaysia will be paying a speculated compensation cost of RM300m, in addition to the SGD15m incurred for postponement previously. Along with the announcement, Dato Mustapa mentioned that due to Covid19 and fiscal stimulus, the original HSR is no longer financially viable and modifications would be required. Some of Malaysia’s revised terms included changes to design, alignment, funding structure (BOT) and shorter tender process. Evidently, these changes were beyond what the Singaporeans found to be agreeable.

Confirming speculation. In the lead up to the announcement, various news sources have raised the possibility of Malaysia solely undertaking the HSR, with a terminus in JB. Multiple realignment features were speculated: i) connection with KLIA and ii) integration with ECRL. We believe realignment and downgraded specifications may have faced opposition from SG given its impact on HSR’s value proposition. We opine that it’s substitutability with air travel was the key consideration for the SG side and realignments coupled with lower specifications would have deteriorated this key value proposition.

Previous ballpark estimates. The original HSR was estimated to cost c.RM60bn: i) RM35bn for MY construction cost, ii) RM10bn SG construction costs and iii) RM15bn for systems & rolling stock. Working with previous estimates, a purely domestic HSR would cost roughly RM50bn which is more expensive (vs previous costs attributed to MY) given systems costs are now fully borne by Malaysia. However, post-cost cutting measures figure could fall considerably.

HLIB’s VIEW

KL-JB HSR? Despite the cancellation, we believe this does not necessarily spell the end for the HSR. Talks of modified HSR ending in JB are gaining credence as our ground checks indicate. In tandem with this, Dato Mustapa stated that GoM will undertake viability study of a domestic HSR. Going alone would provide autonomy in terms of project design, specifications, funding, delivery timeline and appointment of consultants/contractors. Overall, a unilateral undertaking could enable easier implementation of proposed cost cutting measures without need for bilateral consensus. We do not rule out the possibility of SG constructing a final high speed link from JB at a much later stage (if KL-JB proceeds) given the potential economic benefits. Nevertheless, implementation of a revised version we reckon will be carried out on a long term basis given the nascent stage of the project. In the near term, we believe MRT3 remains GoM’s top priority as far as mega jobs are concerned.

Maintain NEUTRAL. We retain our NEUTRAL sector rating as we have previously regarded the HSR as a project to be executed over the longer term and thus unaccounted for in our sector and stock calls. The 12MP will could provide hints over the fate of a domestic HSR.

Top Picks. IJM (BUY, TP: RM1.99) is our top pick in the large cap space as a potential beneficiary of government’s infrastructure pump-priming spurred by its breadth of rail related construction experience. Against this backdrop, the company trades at an attractive P/BV of c.0.65x with all-time low foreign shareholding levels (c.13% vs previous low of 20%). Within the mid-small cap space, we continue to like SunCon (BUY, TP: RM2.11) due to (i) strong balance sheet; (ii) extensive track record of infrastructure projects and (iii) strong support from parent-co.

Source: Hong Leong Investment Bank Research - 4 Jan 2021