Thursday 3 January 2013

IJM (FV RM5.72 – TRADING BUY) Corporate News Flash: Surprising Progress on WCE


THE BUZZ  

IJM’s  23%-owned  associate  Kumpulan  Europlus  told  Bursa  Malaysia  in  a  filing yesterday  that  its  80%-owned  subsidiary,  West  Coast  Expressway  SB  (WCESB),  has entered  into a  concession  agreement  with  the  Malaysian  Government  in  relation  to  the West Coast Expressway (WCE) project spanning Banting in Selangor, to Taiping, Perak.


OUR TAKE 

Project  cost  slashed.  The group’s announcement did not contain much detail but we took note of the fact that  the length of the proposed highway  has been shortened.  The proposed WCE  was  to initially  cover  a  total  of  316km,  of  which 224km  would be  tolled and 92km toll-free. According to Europlus’ latest Bursa filing, the expressway will stretch over a distance of 233km. We understand that this is the resultof the removal of the toll-free  section,  which  we  believe  the  Government  may  have  decided  to  forgo  after thorough  deliberation.  This  move  may  ultimately  translate  into  a  lower  estimated development cost of about RM6bn versus RM7bn previously forthe WCE.

Other terms mostly status quo. We understand from various sources that most of the terms  in  relation  to  the  proposed  WCE  have  been  retained,  except  for  the  interest subsidy  of  up  to  3%  on  commercial  loans  over  a  period  of  22  years,  which  the Government has withdrawn after having initially offered it to WCESB. Among the terms retained are:

1)  the  project  will  be  undertaken  on  a  build-operate-transfer  basis  over  a concession period of 60 years;

2)  the  Government  will  provide  a  support  loan  of  RM2.24bn  commencing  from 2013, at an interest rate of 4% p.a;

3)  toll  revenue  in  excess  of  an  agreed  traffic  volume  will  be  shared  between WCESB  and  the  Government  on  a  70:30  basis prior  to  full  settlement  of  the support loan, and at a 30:70 ratio upon full loan repayment; and

4)  the Government will bear the land acquisition cost of up to RM1bn.

Positive  surprise.  The  announcement  caught  us  by  surprise  as  we  had  not  expected the WCE to make much progress before the country holds its 13th General Election. That said,  we  are  glad  that  the  long-awaited  concession  agreement  is  finally  wrapped  up almost  a  year  after  WCESB  received  approval-in-principle  from the Prime Minister’s Department to undertake the project on 26 Jan 2012.

What’s next?  With  the  concession  agreement  now  in  the  bag,  we  expect  to  see financial closure over the next six to nine months. IJM’s direct exposure to WCE via its 20%  stake  in  WCESB,  as  well  as  its  indirect  exposure  through  23%-owned  Kumpulan Europlus,  reinforces  our  belief  that  the  group  has  the  best  chance  of  securing  the  civil works associated with WCE, for which we estimate at about RM5bn vis-à-vis its current orderbook  of  over  RM4bn.  We  expect  the  related  civil  jobs  to  be  officially  awarded  in 2HCY13. Maintain TRADING BUY on IJM, with our FV unchanged at RM5.72.
Source: OSK

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