Infrastructure: Key takeaways from 'Sarawak Day'

Infrastructure sector
Maintain overweight: We recently hosted a "Sarawak Day" involving four companies which we believe are excellent proxies to the deep development potential of the Sarawak Corridor of Renewable Energy (Score) — Sarawak Cable Bhd (SCB), Hock Seng Lee Sdn Bhd (HSL), Naim Holdings Bhd and Press Metal Bhd. We came away from the conference feeling even more convinced about Score's raw appeal as a future hub for renewable energy. This is largely underpinned by RM26 billion worth of largely private-initiative investments to date (Score was launched in 2008), the bulk of which come from energy-intensive industries.

A key unifying theme projected by the four participating companies is that Sarawak is at the nascent stages of an infrastructure boom. Several key power-related projects that could gain prominence in the months to come are:

• Power dams. After Bakun and Murum, we have learned that Sarawak Energy Bhd (SEB) is lining up at least five more hydro dams (Baram, Baleh, for instance) and two coal-fired plants to meet its targeted 7,000MW generation capacity by 2020. The proposed 600MW coal-fired plant in Balingan worth a estimated US$600 million (RM1.8 billion) is in the advanced stages of implementation.
• Transmission systems. The Edge weekly reported last weekend that SCB is part of a consortium that has been pre-qualified for the proposed 500kV "backbone" line linking Bunut to Kuching. The estimated RM2.5 billion project, which involves transmission works and substations, could be dished out by year-end, ahead of its targeted completion by end-2014 (Phase 1: March 2014). There could be more transmission opportunities through the export of Sarawak's power resources under the Asean inter-transmission master plan.
• Substation works. We gather that there could be over 100 new substations to be developed to cater for Sarawak's increasing power loads. The larger ones could cost up to RM300 million each. Just last month, SCB teamed up with ABB to bid for the Samajaya substation.
• Rural electrification scheme (RES). With time running out for Sarawak to achieve its targeted 95% electricity coverage by end-2012 (currently: 60%+), this may trigger more demand for SCB unit Sarwaja Timur's steel poles.
• Other opportunities. There is a growing probability that the proposed Samalaju port (about RM1.2 billion) will take off by year-end, in which Bintulu Port Holdings could have a role. Several contractors, including HSL, are also eyeing construction opportunities from it. Along with over RM2 billion worth of mostly access roads to the Score energy sites, the development of more energy-intensive industrial zones (especially at Samalaju) should also prod fresh demand for fabrication/building contracts.

Our top two Score picks are SCB and Press Metal. We believe SCB's deepening progression as an integrated transmission line specialist puts the group in a favourable position to tap into SEB's accelerating capital expenditure cycle. To be sure, SCB is pursuing over RM1 billion worth of new jobs against its current order book of about RM384 million. Press Metal benefits as a prime mover in Sarawak. Its proposed Samalaju smelter is poised to triple the group's aluminium capacity to 360,000 tonnes on the back of locked-in supply of long-term energy needs at attractive rates from SEB. Our other "buys" on the Sarawak/Score theme are HSL, Naim, Bintulu Port Sdn Bhd and Jaya Tiasa Holdings Bhd. — AmResearch, Aug 16