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Monday, June 24, 2013

The race is on for monorail (CIMB)

Latest news in the extension of the KL Monorail that the contract scope is now larger came as a positive surprise. MRCB, IJM Corp and Scomi are initial contenders. We believe an IJM-Scomi consortium will have a greater advantage given Scomi's rolling stock expertise.

What Happened 
The Edge Weekly reported that the proposed extension of the KL Monorail to Old Klang Road has sparked new interest and involves further stretching the alignment to Sunway. Sources said that MRCB submitted its proposal to Prasarana a month ago while other companies like IJM Corp are also looking to submit their proposals. In all proposals, Scomi Engineering is the technical partner to provide systems and cars.  

What We Think
This news is not a surprise as we are aware that proposals and tenders for the KL Monorail extension will progress in 2H13. However, stretching the KL Monorail extension to Bandar Sunway is a positive surprise. MRCB's proposal was unexpected as the group did not hint at such a move. 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). The RM3bn potential cost is a huge boost to any order book. Civil works (est. RM2.5bn) will raise IJM's order book by 89% to RM5.3bn and more than double MRCB's to RM3.9bn. We expect a 5-6% pretax margin from the monorail project as the award will be based on an open tender. This news is positive for the overall sector. New rail jobs over the next 5-10 years go beyond MRT and the KL-Singapore HSR. 

What You Should Do 
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 JV'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 Klang Valley worth over RM2bn.

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