Construction MALAYSIA April 19, 2012 Kumpulan Europlus NOT RATED KEUR MK / KEUR.KL Current RM1.24 Market Cap Avg Daily Turnover Free Float Target N/A US$210.8m US$0.45m 69% Previous Target N/A RM646.0m RM1.38m 521.0 m shares Up/downside N/A Conviction CIMB Analyst A clearer roadmap for WCE Though the WCE is shorter than the NSE, its significance and potential spillovers should not be overlooked. This should be the main factor driving its implementation, which in turn, remains the key transformation story for KEuro. We estimate an RNAV of RM2.24, development and catalyse the Sharizan Rosely with 71% coming from the WCE construction, building material and T (60) 3 20849864 concession and 12% from the DCF of property sectors. E [email protected] the group’s share of WCE For other contractors, total construction profits. At 20% RNAV subcontracting works worth as much discount, the stock would be worth as c.RM2bn will be up for grabs T RM1.80, offering 45% upside. E through open tender. For the WCE is the next catalyst in property sector, improved road networks and accessibility will lead to the west coast Company Visit Expert Opinion new developments along the corridor. At RM7.1bn, KEuro’s 80%-owned For KEuro, we believe that the group Channel Check Customer Views WCE will be one of the mega jobs will undertake RM1.5bn worth of under the 10MP. It is another works, which should reverse its milestone in the rollout of large-scale construction losses. projects since the approval of the RM12.5bn Northern double-tracking Clarification on our previous project in 2009 and also a milestone note in the development of a new highway We clarify that the information in the after PLUS Expressways’ North South KEuro report that we released on 13 Expressway (NSE). Apr 2012 did not come from Tan Sri Positive for construction and Chan Ah Chye but came largely from other sources as well as publicly property sectors available information. But our Construction of the WCE will span conclusion that KEuro will emerge as 5-6 years vs. seven years for the NSE. a pure infrastructure play once WCE WCE’s total length of 316km is less gets off the ground still holds. than 50% the length of NSE. But the alignment which runs along the west coast of Selangor should spur new Price Close Relative to FBMKLCI (RHS) Financial summary 1.40 105 1.30 98 FYE Jan FY08 FY09 FY10 FY11 FY12 1.20 92 Revenue 58.5 43.9 50.4 28.0 19.8 1.10 85 Cost of sales (49.7) (40.5) (67.5) (23.8) (16.9) 1.00 78 EBITDA (23.2) 1.2 (12.0) 4.6 79.6 0.90 72 0.8015 65 Finance cost (10.6) (18.8) (25.3) (19.8) (15.9) Vol Vol m 10 Associates 8.9 28.4 2.4 (30.6) (31.9) 5 Pretax profit (24.9) 10.8 (34.9) (46.5) 31.4 Tax 0.2 (0.0) (0.2) (4.1) (0.5) Apr-11 Jul-11 Oct-11 Jan-12 Source: Bloomberg MI (0.1) 0.5 0.7 (0.2) (0.4) Net profit (24.8) 11.2 (34.3) (50.8) 30.5 EPS (sen) (4.8) 2.2 (6.6) (9.7) 5.9 52-week share price range 1.24 P/E (x) (25.6) 56.5 (18.5) (12.5) 20.8 0.88 1.36 DPS (sen) 0.0 0.0 0.0 0.0 0.0 BV/share (RM) 0.25 0.25 0.18 0.21 0.26 P/BV (x) 4.94 4.96 6.61 5.85 4.67 Current ROE (%) -19% 9% -36% -47% 22% SOURCE: CIMB, COMPANY REPORTS IMPORTANT DISCLOSURES. INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Sources: CIMB. COMPANY REPORTS Designed by Eight, Powered by EFA Kumpulan Europlus April 19, 2012 1. PUTTING WCE INTO PERSPECTIVE 1.1 The significance of WCE The significance of WCE and potential spillover/multiplier effects should not be overlooked. This piece provides a brief comparison of West Coast Expressway (WSE) and the North South Expressway (NSE). WCE is shaping up as the most significant highway project since the NSE was completed in 1994. WCE will be one of the mega jobs rolled out under the 10MP and can be considered the most sizeable highway project in nearly 20 years. It is another milestone in the rollout of large-scale projects since the approval of the RM12.5bn Northern double-tracking project in 2009 and the RM20bn MRT SBK line. 1.2 How WCE stacks up vs. NSE While WCE’s absolute cost of RM7.1bn is 18% higher than the RM6bn cost for NSE, its implied cost/km of RM22.3m is more than 3x NSE’s implied cost/km of RM7.8m. This is understandable given the price rise for building materials such as cement, steel, and bitumen which typically make up about 30-40% of total cost. WCE is less than half of the length of the NSE. It covers the coastal areas of the states of Selangor and Perak while NSE traverses largely the mainland area of the entire stretch of Peninsular Malaysia from Kedah in the north down to Johor in the south. It will take 5-6 years to construct the WCE compared to seven years for the NSE. Figure 1: Comparison between WCE and NSE Details WCE NSE Designation : West Coast Expressway (WCE) North South Expressway (NSE) Length : 316km - 224km tolled, 92km toll-free (original length: 275.5km) 772km Project type : Built-operate-transfer (BOT) Built-operate-transfer (BOT) Total cost : RM7.1bn (original cost: RM3.1bn) RM6bn Total cost/km : RM22.3m (original cost/km: RM11.3m) RM7.8m Total land to be acquired : 1,601.7 acres (77.8 acres state land, 1,523.9 acres private land) na : Total cost of RM980m to be borne by the gov't na Construction period : 5-6 years 7 years (1988-94) Concession period : 60 years (33 years as previously reported) 50 years Initial/start-up funding : RM2.2bn Gov't support loan (GSL) of RM2.2bn @ 4% p.a. na : Interest subsidy up to 3% on commercial loans for 22 years Concession owner : West Coast Expressway Sdn Bhd Project Lebuhraya Utara Selatan (PLUS) Major concession owner : Kumpulan Europlus (80%) UEM (51%) Other concession owners : IJM Corp (through Road Builder) - 20% EPF (49%) Coverage area : Linking Banting (Selangor) with Changkat Jering (Perak) Bukit Kayu Hitam (northern Kedah) to Johor Bahru (South) SOURCES: CIMB, COMPANY REPORTS 1.3 WCE is the next catalyst in the west coast Highways on the east coast such as the East Coast Expressway (ECE) were built primarily to improve road networks to the east coast of Peninsular Malaysia where the economic impact is arguably lower. In comparison, we believe the economic impact of highway infrastructure in the west coast of Peninsular Malaysia could be greater as the area is relatively more developed and heavily populated. WCE is, therefore, likely to have a greater impact on coastal towns and help spur new developments for tourism and other industries. 2 Kumpulan Europlus April 19, 2012 Figure 2: WCE’s route SOURCES: CIMB Figure 3: NSE’s route SOURCES: CIMB 1.4 Positive for contractors, building material suppliers and property sector The RM7.1bn cost for WCE is substantially higher than the RM3.5bn estimated several years ago due to (i) an increase in the route from 216km to 316km, (ii) the building of an additional 9km viaduct costing c.RM500m, and (iii) the shifting of the entire WCE alignment from the midlands to the coastal area of the Selangor state. Of the RM7.1bn total cost, there could be c.RM2bn worth of subcontracting opportunities or about 28% of the total cost. Similar to the NSE where construction was undertaken by various contractors, WCE will be built in packages by subcontractors which will be selected through open tender. Our checks with other contractors indicated that each package could be worth RM400m-500m. WCE will also generate demand for key inputs such as steel, cement and bitumen which typically account for 30-40% of cost. For the property sector, improved road networks and accessibility will lead to new developments along the corridor and provide landbanking opportunities 3 Kumpulan Europlus April 19, 2012 for property developers. One key development that will take off in 2012 is the est. RM10-12bn GDV, 1,878-acre Canal City land. Canal City is owned by Radiant Pillar in which KEuro holds a 50% stake while IJM Land (IJML MK, Not Rated) controls the balance. The Canal City land is located near the alignment of WCE. 2. VALUATION 2.1 Clarification on our previous note We clarify that the information in the KEuro report that we released on 13 Apr 2012 did not come from Tan Sri Chan Ah Chye but came largely from other sources as well as publicly available information. But our conclusion that KEuro, a 22.5% associate of IJM Corp, will emerge as a pure infrastructure play once WCE gets off the ground still holds. This will boost KEuro’s profile as a major infrastructure stock filling the gap left when PLUS Expressways was taken private. Figure 4: Structure of WCE 22.5% K Euro IJM Corp 80% 20% WCE Sdn Bhd West Coast Expressway 60-year concession 316km SOURCES: CIMB, COMPANY REPORTS 2.2 WCE to enhance value of KEuro We present again our calculations on the potential value accretion from WCE.