Tuesday June 25, 2013

Monorail job a construction catalyst

Analyst Reports


By CIMB Research

THE KL Monorail extension sits on top of other rail transport upgrade jobs, that is the mass rail transit (MRT) and the KL-Singapore high-speed rail (HSR), and is positive for sector catalysts in the second half of 2013.

The RM3bil potential cost is a huge boost to any order book.

We maintain “overweight” as government execution on larger-scale projects will be more rapid in the coming months.

It was reported that the proposed extension of the KL Monorail to Old Klang Road had sparked new interest and involved stretching the alignment to Sunway.

Sources said that Malaysian Resources Corp Bhd (MRCB) submitted its proposal to Prasarana a month ago while other companies like IJM Corp were also looking to submit their proposals.

In all proposals, Scomi Engineering is the technical partner to provide systems and cars.

This news is not surprising as we are aware that proposals and tenders for the KL Monorail extension will progress in the second half.

However, stretching the KL Monorail extension to Bandar Sunway is a positive surprise.

IJM's incoming proposal is in line with the group's guidance that it will continue to explore domestic infrastructure opportunities in collaboration with Scomi (IJM holds a 9.1% stake).

Civil works, estimated at RM2.5bil, will raise IJM's order book by 89% to RM5.3bil and more than double MRCB's to RM3.9bil.

We expect a 5%-6% pre-tax margin from the monorail project as the award will be based on an open tender.

This news is positive for the overall sector.

Investors should stay invested in MRCB and IJM as expectations that both companies will win the monorail job could trigger a re-rating.

However, we prefer IJM to MRCB for exposure to monorail jobs.

We believe an IJM-Scomi consortium stands a better chance of winning the bid as the joint venture's cost advantage lies in Scomi's expertise in monorail rolling stocks.

MRCB may not lose out as it was reported that the group is the frontrunner for freight rail upgrade jobs in the Klang Valley worth RM2bil.


By Alliance Research

BUY (maintained)

Target price: RM9.64

CIMB announced that it has decided to abort the proposed plan to acquire a controlling stake in Manila-based Bank of Commerce (BOC) from owners led by San Miguel Corp (SMC) for about 12,203 million peso (RM881mil), to be fully settled in cash.

We are not surprised by such a move since management had indicated early May that the group could walk away from the deal should both parties disagree on the terms of the collaboration agreement.

Although scrapping the proposed acquisition would effectively hold back CIMB's intention to venture into the Philippines, it would not have a significant impact on the group's near-term earnings prospects.

We maintain our BUY recommendation on the group with an unchanged target price of RM9.64.

Back then, CIMB had also entered into a collaboration agreement with SMC, allowing strategic alliances between CIMB Group and SMC Group, also to allow the latter to provide on-going support to BOC.

Post-acquisition, SMC will remain the largest minority shareholder of BOC with a 27% stake.

Our new target price implies a 2.1x financial year 2014 (FY14) price-to-book (P/B) and 16.2% return on equity (ROE) based on our Gordon Growth valuation model.

We continue to view CIMB as one of the prime beneficiaries of rising business loans stemming from the rolling out of Entry Point Projects (EPP) under the government's Economic Transformation Programme (ETP), and serves as a good proxy for exposure to the robust ASEAN region.

Downside risks to our recommendation include: Vulnerability to foreign selldown in view of its high foreign shareholdings of 42.7% as at end-May 2013; slower than expected cost cutting exercise; unexpected drying of deal flows due to the volatility of the capital market; and lower than expected topline growth due to a significant slowdown in loan growth.

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