• HSR to be revived? Transport Minister Loke Siew Fook at the Invest Malaysia event cited that Malaysia is open to proposals aimed at reviving the Kuala Lumpur-Singapore High-Speed Rail (HSR) project as long as it is not funded by the Government. The Government welcomes any proposal from the private sector to continue the mega project. However, it has yet to receive any specific or complete proposal from the private sector, and there is no timeline to complete the project since the agreement had been cancelled previously.

• Any precedence of large rail projects fully funded by the private sector? Taking into consideration the private sector’s requirement to fully fund the HSR project, it is worthwhile looking at the funding mechanism of other railway projects in other countries. Our findings show that high speed railway projects of similar nature to HSR such as the Eurostar high-speed rail service (estimated cost: >USD10bn) and the Bangkok-Chiang Mai high speed railway (estimated cost: USD12.9bn) are funded via a combination of government and private financing initiatives.

• Who supposedly benefitted in the past. Gamuda and Malaysian Resources Corporation (MRC) via a 50:50 JV secured a contract commissioning the JV company as the project delivery partner for the northern section of the KL-SG HSR back in 2018 before it was cancelled. The contract also required the JV company to submit a commitment bond amounting to MYR5m and corporate guarantees issued by both MRC and Gamuda to MyHSR Corp within 14 days from the award of the contract.

• Our thoughts. With the absence of any precedence of high speed railway projects being fully funded by the private sector in other countries, we think that it may be difficult for the Government to attract full private sector funding for this project. Moreover, Gamuda’s net gearing is expected to be at c.0.2x post-acquisition of Downer’s Australian transport projects and this may likely increase further as the company has earmarked around MYR2bn worth of investments for the renewable energy segment. Meanwhile, MRC has a net gearing of 0.3x as at end FY22 with its strategy focusing on the redevelopment of the Shah Alam stadium complex together with its upcoming overseas property launches in Australia and New Zealand with a total GDV of >MYR1.5bn in FY23F-24F.

• Political risk may also come into play if the implementation of the project is prolonged until the next general election. The risk comes in the form of the new administration deciding to not proceed with it.

• Top Picks. We continue to reiterate names from the small- and mid-cap construction space such as Kerjaya Prospek and Sunway Construction. Overall, we believe these companies are able to weather the lack of public mega infrastructure projects. Maintain NEUTRAL on the sector.

• Upside/downside risks to our sector call are smaller/larger cost reductions in MRT3 costs, and faster/slower project rollouts.

Source: RHB Research - 9 Mar 2023