A consortium comprising French train maker Alstom and IJMPESTECH JV has been awarded the RM456.1m KLIA Aerotrain Replacement project. The job is IJM’s stepping stone to rail electrification projects by sharpening its competitive edge for upcoming mega rail projects. We maintain our forecasts, TP of RM2.31 and OUTPERFORM call.

A consortium comprising French train maker Alstom and IJMPESTECH JV has been awarded the RM456.1m KLIA Aerotrain Replacement project by AIRPORT (MP; TP: RM7.00). Alstom will be the project coordination lead and supplier of the rolling stock while IJMPESTECH JV will be in charge of civil engineering and electrification works worth RM175.6m, which will be split 60:40 between IJM and PESTECH (Not Rated). Therefore, IJM’s portion is RM105.4m. The project will commence with immediate effect, to be completed by Mar 2025.

Recall, the job was first awarded to PESTECH in 2021 with Alstom aerotrain system. The original contract was worth RM743.0m comprising RM396.5m for EPC job scope and aerotrain system, RM104.2m in financing cost and RM242.7m for operation and maintenance concession. However, the contract was terminated in Aug 2023 due to PESTECH’s non-performance.

The new contract value of RM456.1m is arrived at by adding 15% on the original contract value of RM396.5m to reflect the cost increase, while the delivery timeline is kept at Mar 2025.

While 60% of the EPC portion or RM105.4m is relatively small to IJM, we are positive on this contract re-appointment as well as the partnership as it gives IJM an immediate presence in the rail electrification space. It will be able to strengthen and widen its potential roles in the impending mega rail projects such as MRT3 and Bayan Lepas LRT Line.

The latest contract has boosted IJM’s YTD FY24 job wins to RM2.01b (vs. our full-year assumption of RM3b) and its outstanding construction order book to RM6.3b.

Forecasts: Maintained

Outlook. We expect a significant revitalisation of the construction sector in 2024 backed by: (i) the roll-out of the RM45b MRT3 project, RM9.5b Bayan Lepas LRT and six flood mitigation projects reportedly to be worth RM13b, and (ii) the vibrant private sector construction market, underpinned by massive investment in new semiconductor foundries and data centres. We understand that IJM is also eyeing work packages from ECRL and various projects in East Malaysia and Indonesia.

Valuations. We maintain our SoP-driven TP of RM2.31 (see below) on unchanged 18x PER valuation for its construction business, which is inline with our valuation for big cap construction companies, i.e. GAMUDA (OP; TP: RM5.45) and SUNCON (OP; TP: RM2.39). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Source: Kenanga Research - 18 Jan 2024