News that MSW’s proposed Iskandar rail project may be scrapped, after a  long-drawn  approval  process,  does  not  surprise  us.  While  we  have had low expectations of the project, the news may disappoint investors who  bought  the  stock  purely  on  the  Iskandar-based  contract.  As  its share  price  offers  limited  upside  to  our  MYR1.08  FV,  we  downgrade MSW to NEUTRAL from Trading Buy. 
 
- Rail plan possibly shelved. A Business Times report today quoted first-hand sources that the RM1.23bn intra-city rail line for Iskandar Malaysia in  Johor  will  be  scrapped.  According  to  the  report,  this  was  due  to  the Government wanting to focus on the high-speed rail system linking Kuala Lumpur  and  Singapore,  which  will  likely  have  a  stop  in  Iskandar Malaysia, and the Rapid Transit System from Johor Baru to Woodlands in  Singapore.  The  Metropolitan  Commuter  Network  (MCN)  is  private initiative  proposed  by  a  60:40  joint  venture  between  Malaysia  Steel Works (MSW) and KUB Malaysia (KUB MK, NR).

- No  surprise.  We  are  not  surprised  with  the  news  as  the  approval process for the project has been long-drawn since the MCN was mooted back in Jan 2011. Note that we have always had low expectations on the proposed 106.5km rail transit network, which would have linked Iskandar Malaysia  and  Woodlands  in  Singapore.  The  length  of  the  network, coupled  with  the  fact  that  the  Iskandar  corridor  is  less  populated, suggests  many  challenges  in  running  this  type  of  public  transportation project.   

- Downgrade to NEUTRAL. While we make no change to our estimates - as  we  had  not  incorporated  any  earnings  contributions  from  the  rail project  into  our  numbers  -  we  understand  certain  investors  may  be disappointed  over  the  new  development,  as  they  invested  on  the  stock on high expectations of the MCN’s success. As MSW’s share price now offers limited upside to our MYR1.08 fair value, we downgrade the stock to  NEUTRAL  from  Trading  Buy.  We  value  MSW  based  on  0.4x  FY14 P/BV, or the mean of the stock’s historical trading range.

Source: RHB