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KL-JB HSR will still be positive for construction sector, say analysts

KUALA LUMPUR (Jan 4): The government's move to replace the cancelled Kuala Lumpur-Singapore High Speed Rail project (KL-Singapore HSR) with the Kuala Lumpur-Johor Baru HSR (KL-JB HSR) will still be positive for the construction sector, say analysts.  

CGS-CIMB’s analyst Sharizan Rosely said in a note today that based on his preliminary checks, he expects feasibility studies for the KL-JB HSR to be expedited in 2021 and to focus on reducing the original civil works cost of between RM50 billion and RM55 billion, for 60% to 70% of total 350km HSR development cost, excluding rolling stock and systems.

“We believe the revised cost of the new HSR line will still be sizeable as the distance is only about 10% shorter.

“Overall, cancellation of the KL-Singapore HSR is negative news but replacing it with the KL-JB HSR would still be positive for local rail players,” Sharizan said.

While a domestic HSR initiative may adopt a privatization or private finance initiative (PFI) model given the government’s fiscal limitations, he opined that the project still benefits local contractors, similar to the mass rapid transit (MRT) project.

While maintaining a "neutral" call on the sector, he opined that YTL Corp Bhd (add, target price: 85 sen), IJM Corporation Bhd (add, TP: RM1.81) and Malaysian Resources Corp Bhd (add, TP: 56 sen) are still likely major beneficiaries for the project.

Despite the cancellation of the KL-Singapore HSR, Hong Leong Investment Bank Research head Jeremy Goh believes that this does not necessarily spell the end of the project.

“Talks of modified HSR ending in JB are gaining credence as our ground checks indicate. Going alone would provide autonomy in terms of project design, specifications, funding, delivery timeline and appointment of consultants/contractors,” Goh said.

Overall, he opined that a unilateral undertaking could enable easier implementation of proposed cost-cutting measures without the need for bilateral consensus.

“We do not rule out the possibility of Singapore constructing a final high-speed link from JB at a much later stage (if KL-JB proceeds) given the potential economic benefits.

“Nevertheless, implementation of a revised version we reckon will be carried out on a long-term basis given the nascent stage of the project. In the near term, we believe MRT3 remains the government of Malaysia’s top priority as far as mega jobs are concerned,” he said.

Goh said the research house retained its "neutral" sector rating as it has previously regarded the HSR as a project to be executed over the longer term and thus unaccounted for in its sector and stock calls.

IJM Corp (buy, TP: RM1.99) is the research house's top pick in the large cap space as a potential beneficiary of government’s infrastructure pump-priming spurred by its breadth of rail-related construction experience.

“Against this backdrop, the company trades at an attractive price-to-book value of about 0.65 times with all-time low foreign shareholding levels (about 13% versus previous low of 20%),” he said.  

Within the mid-small cap space, he said, the research house continues to like Sunway Construction Group Bhd (buy, TP: RM2.11) due to a strong balance sheet, extensive track record of infrastructure projects and strong support from the parent company.

The Malaysian and Singaporean governments announced last Friday that they had decided to terminate the KL-Singapore HSR project as both countries could not reach an agreement on several changes that the Malaysian government proposed.

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