Yesterday, a long-awaited news finally materialized when Kumpulan Europlus (KEURO) (Not Rated) announced that its 80%-owned subsidiary West Coast Expressway Sdn Bhd (WCESB) has received a written confirmation from the Government of Malaysia that WCESB has complied with all the conditions precedent in respect of the Concession Agreement. The effective date of the Concession Agreement is on 20 December 2013. Therefore, with the confirmation of the effective date, WCESB can finally commence work on the West Coast Expressway (WCE) project. The news is well within our anticipation and we are POSITIVE that it is finally materialised. As mentioned previously in our 4Q13 strategy, IJM (OP; TP: RM6.60) will benefit most from this development given the strong likelihood that the giant contractor, which effectively owns 38.2% of the highway, will undertake a big chunk of the works (i.e. 70% or approximately RM4.0b out of RM6.0b total project cost). Hence, we reckon IJM will be appointed as the main contractor for the project by KEURO soon. In addition, we believe that the other highway infrastructure-related contractors such as WCT (OP; TP: RM2.50), GADANG (Not Rated), MUHIBBAH (OP; TP: RM3.00), MUDAJAYA (Not Rated) will also benefit from this news as they could be amongst the sub-contractors for the highway. All in, we are maintaining our OVERWEIGHT recommendation on construction sector with GAMUDA (OP; TP: RM5.25) and IJM CORP (OP; TP: RM6.60) as our Top picks.

About WCE highway. WCE highway is fully-owned by WCESB, which is 80%-owned by KEURO and 20% owned by IJM CORP. The highway’s build-operate-transfer (BOT) concession was signed in January 2013. It spans 233 kilometres across Selangor and Perak connecting Banting to Taiping with 20 toll plazas (9 in Selangor, 11 in Perak) with 21 interchanges (10 in Selangor, 11 in Perak) and it is linked to the existing highways such as PLUS, SKVE, NKVE, NNKSB, LATAR and KESAS. Total project cost is estimated at RM6.0b and it will take about 5 years to complete.

Timeline. Generally, it would take about 3-6 months time for land acquisitions and tender process to complete before the actual works commence. Hence we estimate the actual job awards will be dished out from 2H14 onwards.

IJM, the prime beneficiary. As mentioned in our 4Q13 strategy note, we believe IJM will be the biggest beneficiary for the highway construction where: (i) the WCE highway will top-up its orderbook by at least RM4.0b on the existing RM3.0b, (ii) its 62-% owned subsidiary, IJMLAND (OP, TP: RM3.15) is currently developing a new township worth RM11b GDV spanning over 1878ac in the Kota Kemuning area, a.k.a. Rimbayu, next to the highway, (iii) the highway will keep its manufacturing division busy supplying quarry products and concrete piles to the highway construction, and (iv) the highway will bring another stream of recurring income in the foreseeable future after becoming operational (estimate: 2016) as it is effectively owns 38% of the highway operator, WCESB (i.e. direct stake of 20% of WCESB and 22% of KEURO). We have already imputed RM4.0b new orderbook in our FY15 estimates to reflect this project.

Other infra-related contractors will benefit as well. Given the sizeable RM6.0b worth of the project, we believe it will benefit other contractors such as WCT (OP; TP: RM2.50), GADANG (Not Rated), MUHIBBAH (OP; TP: RM3.00), and MUDAJAYA (Not Rated) as well. In fact, some of the companies that mentioned above intent to participate in the project as well.

Maintain OVERWEIGHT, BUY IJM. As the long-awaited WCE can officially and finally commence works, this could shrug off all the delay concerns of this mega project. We advocate investors to accumulate the prime beneficiary of the project - IJM - as the stock’s valuation is trading at only 12.9x Fwd-PER against its 5-year historical PER average of 17x. We have an OUTPERFORM rating on the stock with Target price of RM6.61 based on SOP-derived valuation. All in, we are maintaining our OVERWEIGHT recommendation on construction sector with GAMUDA (OP; TP: RM5.25) and IJM (OP; TP: RM6.60) as our Top Picks.

Source: Kenanga