■ This is in line with our expectations of a recovery in Pan Borneo’s newsflow in 2H16.
■ Gamuda, IJM Corp, Sunway and WCT are among the larger Klang Valley-based JV partners that are key contenders.
● StarBiz reported that eight major works packages worth up to RM10bn (US$2.5bn) for Pan Borneo Sarawak were finalised and would be awarded by this month. Among the Sarawak firms that had participated in the tenders are Cahya Mata Sarawak, Shin Yang Shipping and Naim Cendera. Some of the prominent bidders are JV companies where partners comprise of one Peninsular Malaysia-based firm and an East Malaysia player.
RM16bn estimated cost for Sarawak
● Based on our checks, the RM16bn (US$3.9bn) estimated cost is unchanged. YTD, two packages worth a combined RM3.2bn (US$780m were awarded to Zecon-Kimlun JV (RM1.5bn) and HSL-Daya Maju JV (RM1.7bn). Indications are that at least 4-5 packages will be awarded over the coming weeks, with the balance in the later part of 2016. In our sector outlook report in April, we highlighted that the RM16bn total construction covers a total alignment of 1,090km.
Funding is in the works
● Works Minister Datuk Seri Fadillah Yusof recently said more than 60% of the construction costs would be borne by the issuance of new sukuk by DanaInfraNasional while a further RM5bn (US$1.2bn) would come from the state’s development expenditure. According to the minister, this is the first time that DanaInfra has undertaken project financing beyond the MRT 1 and MRT 2 projects. The issuance of the bonds is timed for August and September.
Equal winning chance for Klang Valley contractors
● The roll-out of the Pan Borneo phase two awards is good news for both Sarawak and Klang Valley-based players given the predetermined JV structure for the tender phase. Most contractors under our coverage are among the contenders but we believe the key ones to watch out for are Gamuda, IJM Corp, Sunway (via Sunway Construction) and WCT. They are among the larger Klang Valley-based JV partners that are key contenders; at least RM1bn from each package if awarded.
Pan Borneo carries minimal execution risks, in our view
● Downside risks to Pan Borneo’s story are delays but we believe this is mitigated by the positive award momentum YTD. We believe Gamuda, our big-cap top pick, is among the frontrunners for this awards phase and a win could boost its all-time high order book of RM8.2bn (US$2bn) by 14%. We think WCT also stands a good chance given its track record in road works, with a potential 20% boost to its current unbilled order book of RM4.4bn (US$1.1bn ).
Overweight; 2H16 sector drivers intact
● This development ties in with our expectations of an overall recovery of sector drivers in 2H16. In our view, other key sector catalysts in the months ahead are 1) recovery in the award phase for MRT 2’s southern portal, 2) announcement of Budget 2017 in October, and 3) recovery in private sector-driven jobs. Separately, a dark horse could be stronger follow-up momentum on the execution of the KL-Singapore high speed rail (HSR) project.