January 14, 2020 Malaysia Construction POSITIVE [Upgrade] Improving optics Analyst U/G to POSITIVE Near-term sector re-rating catalyst would be the formalization of the Adrian Wong, CFA PTMP PDP agreement, allowing the Bayan Lepas LRT to officially roll-out. (603) 2297 8675 Job awards are also expected to gradually pick up in 2020 with the ECRL [email protected] subcontracting works in focus. While the KL-SG HSR and KVMRT 3 remain wildcards at this juncture, any announcement of their revival in 2020 will excite the market. We are upbeat on the sector’s outlook in 2020; U/G to POSITIVE with Gamuda as our preferred BUY pick. 2020: Job awards to pick up Construction We expect the value of new job awards to gradually pick up in 2020 with the ECRL subcontracting packages in focus. With the 3-month long public display of the realignment of the Kota Bahru-Dungun stretch set to complete by Feb 2020, we believe tenders for the subcontracting civil work packages could start by 2Q20 with awards in 2H20. We also expect awards of the remaining packages from the on-going projects in East Malaysia such as the Pan Borneo Sabah Highway, Sarawak Coastal and Second Link Road (details of projects in Fig 9) in 2020. Malaysia 2020: PTMP close to fruition The Penang State Government had, in Oct 2019, received a Federal Government Guarantee to raise bonds to fund the Bayan Lepas LRT (e.MYR8b), which will expedite the start of the Penang Transport Master Plan (PTMP) project. Assuming the Project Delivery Partner (PDP) agreement is finalized within 1Q20, we could see the first awards by end- 2020. An official start for the PTMP could re-rate the sector with Gamuda as an early beneficiary. We see earnings upside potential for Gamuda, pending finalization of SRS Consortium’s PDP agreement (Gamuda has a 60% stake in SRS Consortium). Sector BUY picks In the near term, finalization of the PTMP’s PDP details and securing the necessary bond funding to kick start the PTMP’s Bayan Lepas LRT project could present the sector with a re-rating catalyst. Gamuda (GAM MK; U/G to BUY) is our preferred sector pick as an early beneficiary of the PTMP. We also like Sunway Construction (SCGB MK; U/G to BUY) for its strong replenishment pipeline, supported by in-house development projects from its parent, Sunway Berhad (SWB MK; HOLD; TP: MYR1.74). CMS (CMS MK; maintain BUY) remains a proxy to development activities in Sarawak as the State heads for a State Election before Sep 2021. Stock Bloomberg Mkt cap Rating Price TP Upside P/E (x) P/B (x) Div yld (%) code (USD'm) (LC) (LC) (%) 19E 20E 19E 20E 19E 20E Gamuda GAM MK 2,424 Buy 3.99 4.50 16 12.7 13.6 1.1 1.2 3.2 3.0 IJM Corp IJM MK 1,991 Hold 2.23 2.10 (3) 20.4 20.7 0.8 0.8 1.8 2.7 Lingkaran Trans Kota LTK MK 613 Buy 4.70 5.21 11 9.4 9.5 2.4 2.3 5.9 5.3 Cahya Mata S. CMS MK 606 Buy 2.30 2.85 26 12.8 11.8 0.9 0.9 2.4 2.6 Sunway Const'n SCGB MK 574 Buy 1.81 2.05 17 17.5 15.1 3.7 3.3 3.9 3.9 Hock Seng Lee HSL MK 179 Hold 1.33 1.40 7 12.0 11.2 0.9 0.8 1.8 1.8 Kimlun KICB MK 103 Buy 1.23 1.50 25 6.5 6.2 0.6 0.5 3.1 3.2 THIS REPORT HAS BEEN PREPARED BY MAYBANK INVESTMENT BANK BERHAD PP16832/01/2013 (031128) SEE PAGE 10 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Malaysia Construction A recap of 2019 Renewed optimism With a series of major infra projects (KVMRT 2, KVLRT 3) having undergone their cost reviews in the previous year, 2019 brought some relief to the sector with the revival of key projects such as the i) East Coast Rail Link (ECRL) [MYR44b]; ii) Bandar Malaysia (GDV: e.MYR140b) and iii) Johor-SG RTS Link (e.MYR3.2b). The slightly higher Gross Development Expenditure (GDE) allocation of MYR56b for 2020 (+4.3% YoY) announced in Budget 2020 also signals the Government’s commitment to develop public infrastructure and rural development especially in the deeper parts of Sabah and Sarawak. Fig 1: Status of revived major infrastructure projects Estimated Projects Value Updates (MYR b) ECRL 44.0 Project to be implemented at a lower cost of MYR44b which includes infrastructure, tunneling, system & track works except for land acquisition. Up to 50% of project cost could be for civil/infra works, of which local participation is expected to make up 40% of the civil works portion. Kota Bahru to Dungun stretch (Package A; 210km) is undergoing its public inspection process. Subcontracting awards expected to start in 2H20. Site clearing and earthworks for the Dungun to Mentakab stretch (Package B; 223km) currently in full swing. Johor-SG RTS Link 3.2 Malaysia Government intends to continue with the implementation of the Johor-SG RTS Link as announced in Budget 2020. Singapore and Malaysia to defer the project implementation till 30 Apr 2020, pending review of the costs. Bandar Malaysia 140.0 Bandar Malaysia to be developed over 20 years with IWH-CREC reinstated as its master developer. The project will house a 28.3ha People’s Park and 10,000 units of affordable housing and greater Bumiputera participation. Source: Various No expropriation of tolled highways In Jun 2019, the Government of Malaysia has offered to acquire Gamuda’s four urban highway concessions – KESAS, LDP, SPRINT and SMART - for a total cash consideration of MYR6.2b (details in Fig 2). We deemed the implied effective equity value of MYR2.36b (MYR0.96/Gamuda shr) for the four highways to be fair when compared against our DCF value of MYR2.56b. The proposed acquisition by the Government essentially alleviates concerns of any potential expropriation of the tolled highways and could set the precedence for future takeovers. Fig 2: Individual highway equity value based on proposed offer price Highways Purchase consideration Gamuda’s effective stake Anticipated equity value, Gamuda's share of anticipated (MYR b) (%) calculated by Gamuda (MYR b) equity value (MYR b) (a) (b) (a)x(b) KESAS 1.377 70.0% 1.23 0.86 LDP 2.470 43.6% 2.34 1.02 SPRINT 1.984 51.8% 0.87 0.45 SMART 0.369 50.0% 0.06 0.03 Total 6.200 4.50 2.36 Source: Gamuda announcement *Purchase consideration figures have yet to deduct any form of indebtedness (outstanding dividends, interests, loans etc) January 14, 2020 2 Malaysia Construction What’s in store for 2020? 1) Job awards to gradually pick up We believe the momentum on contract awards and job flows would gradually pick up in 2020. With the proposed new alignment of the Kota Bharu-Dungun stretch (Package A; 210.4km) of the ECRL currently undergoing its 3-month public inspection process till 24 Feb 2020, we expect tenders for the ECRL’s subcontracting civil work packages to start in 2Q20. We estimate local contractors stand to secure up to MYR10b of jobs from the ECRL based on the rule of thumb that 40% of total civil works will be awarded to local contractors. Fig 3: Selected contractors with exposure/interest in the original ECRL project Companies Details Civil works IJM Corp Supply of spun piles to the ECRL and potential station works near Kuantan Port. Its 60%-owned Kuantan Port is also a long-term beneficiary of the ECRL. Gabungan AQRS Submitted tender for a sub-contracting package under CCCC previously. AQRS is also the master developer of KotaSAS in Pahang. Kimlun, WCT, Sunway Expressed interest to bid for construction works from the ECRL. Construction Supply of materials Malayan Cement Awarded a MYR270m contract to supply cement to ECRL. Others HSS Engineering Secured consulting engineering works for ECRL with a value of MYR82.5m. Econpile Expressed interest to bid for piling works from the ECRL. Advancecon Expressed interest to bid for land clearing works from ECRL. Gabungan AQRS (AQRS MK, Not Rated), WCT (WCTHG MK, Not Rated), Malayan Cement (LMC MK, HOLD, TP: MYR3.30), HSS Engineering (HSS MK, Not Rated), Econpile (ECON MK, Not Rated), Advancecon (ADVC MK, Not Rated); Source: Company data, Maybank Kim Eng; List is non-exhaustive KL-SG HSR and KVMRT 3 projects remain wildcards. To recall, both Malaysia and Singapore have set 31 May 2020 as a deadline to decide on the High-Speed Rail (HSR) project pending on-going cost reviews. As for the KVMRT 3, newsflow from the earlier part of 2019 indicated that the project could be revived with a lower cost of MYR22.5b (50% discount). We believe both major infra projects are likely to feature under the 12th Malaysia Plan (2021-2025). 2) PTMP close to rolling out The Penang State Government had, in Oct 2019, received a Federal Government Guarantee to raise bonds to fund the Bayan Lepas LRT (e.MYR8b) portion of the Penang Transport Master Plan (PTMP). This development is positive, suggesting that the execution of the Bayan Lepas LRT will not solely be contingent upon funding from the Penang South Reclamation (PSR) which would require at least four to five years before its reclaimed land can be monetized. Assuming the Project Delivery Partner (PDP) agreement between the Penang State Government and SRS Consortium (60%-owned by Gamuda) is finalized within 1Q20, we could see the first job awards for the Bayan Lepas LRT to start by end-2020.