IJM Corporation - KEuro bags WCE concession

News   Kumpulan Europlus Berhad (KEuro) announced that its 80% subsidiary, WCESB, had entered into a concession agreement (CA) with the Government of Malaysia (GOM) on the privatisation of the West Coast Expressway project based on a Built-OperateTransfer (BOT) scheme for a period of 60 years. There are no other concession details in the announcement. 

  

Comments   Within expectation. This is not a surprise to us as we all the while were expecting the announcement to be out in early 2013 towards the election period (April – June). There are no other details on the concession terms in the announcement, but we expect the project cost could be in the range of RM7.3b to RM7.5b. We reckon the cost deviation is likely due to the higher cost for land acquisition. Based on the last announcement, the land cost is expected to be around RM980m. We gather that IJM will book in c.RM4.0b worth of construction contract from the project.  

 

 No details on CA terms. To recap, the GOM would loan RM2.2b (GSL) to WCESB to finance the project and will subsidise the interest cost by 3% on the remaining financing scheme for a period of 22 years. We are unsure if this term is maintained at this juncture. Other than that, the excess in toll revenue from the projected traffic volume will be split into two to GOM and KEuro based on a ratio of 70:30.

  

 Contract award likely in 3 to 9 months. We expect the contract award to IJM to take up from three to nine months time depending on timing of KEuro to secure the financing. In the meantime, with the GSL in place, KEuro will be able to immediately start the preliminary works.  

  

Outlook  Its current order book stands at c.RM2.6b and the WCE contract will boost the order book up to RM7.0b. This will last it or the next four to five years. 

  

Forecast  We have already factored in the contract from WCE in our forecast and we expect IJM to secure another RM2.5b worth of new contracts in 2013.

  

Rating    Maintain  MARKET PERFORM

 We expect a mild positive share price movement from the announcement. We, however, believe that the overhang issue from its acquisition of Scomi will continue to dampen share price performance.  

  

Valuation   We are maintaining our TP at RM4.72 based on SOP.

  

Risks  Political risk, higher building material prices and delays in contract award (ETP based projects).

Source: Kenanga