nfrastructure - SCORE forging through OVERWEIGHT

- TheEdgeDaily  reported that the scrapping of the Rio-Tinto Aluminium (Malaysia) Sdn Bhd (RTA)-Cahya Mata Sarawak (CMS) JV to develop a new RM7bil aluminium smelter is unlikely to cause a significant dent on the implementation of SCORE. We had written yesterday that both parties had mutually decided to terminate the JV (Sarawak Aluminium Co Sdn Bhd or SALCO) after they failed to finalise commercial power supply terms with state-utility firm, Sarawak Energy Bhd (SEB). Last October, RTA was also reportedly set to divest 13 assets that could either be sold-off or consolidated into a larger entity – as part of the mining giant’s $8bil asset divestment programme.

- More importantly, we believe SCORE’s massive attractive proposition remains firmly intact. This is largely driven by its ability to offer attractive and long-term sustainable supply of power, underpinned by SEB’s RM22bil capex program until 2020. 

- The Sarawak government had indicated that at least  20 companies have already been shortlisted to invest at Samalaju Industrial Park – where four pioneer investors (Press Metal, OM Holdings, Asia Mineral Ltd and Tokuyama) have already taken off the ground.

- To be sure, SEB had indicated on Bernama that it is confident of filling up the required power requirements that was not taken up by the RTA-CMS JV.  As things stand, SEB is already targeting to sell more than 2,000MW of its power – implying that the entire firm output of the Bakun hydroelectric dam (~1,771MW out of total generation capacity of 2,400MW) has already been pre-committed.

- CMS itself has also recently taken up a 20% stake in the planned 600,0000-tonne manganese and ferro alloy smelter by Australian-listed OM Holdings Ltd. The smelter is scheduled to commence operations in 2013.

- With increasing power demand, we see expect the Sarawak government to step-up in the roll-out of basic infrastructure that is required to support these massive energy-intensive investments. Based on our recent ground checks, some RM1.1bil worth of federal funding has already been allocated for this year – including a RM500mil facilitation fund to kick-start a new port at Samalaju.

- We envisage at least four major infrastructure projects that are likely to be rolled-out over the next few months: (i) 600MW Balingian coal-fired power plant (RM2.5bil); (ii) 500kV backbone transmission system (Bunut-Kuching)  [RM3bil]; (iii) balance of works for the Kuching Sewerage project (RM~RM1.7bil); and (iv) New Samalaju port (RM1bil).

   

- For strategic positioning within Sarawak’s SCORE, we recommend investors to BUY Hock Seng Lee (HSL) and Sarawak Cable for their respective select strengths in marine/civil construction and transmission line-related work. From our an end-user standpoint, our pick is Press Metal which is three out of the four pioneer investors which have already secured long-term power supply agreements with SEB. Phase 2 of Press Metal’s plant – when completed in stages by June next year – would triple the group’s capacity to 360,000 tonnes and solidify its solid progression as the largest integrated aluminium producer within ASEAN.

Source: AmeSecurities