IJM Corporation - WCE agreement in a fortnight’s time? BUY

By AmResearch
16 Apr 2012

- Maintain BUY on IJM Corp with an unchanged sum-ofparts-derived fair value of RM7.23/share. The Edge Weekly reported that Kumpulan Europlus is due to sign a concession agreement (CA) for the West Coast Expressway (WCE) within the next two weeks.

- This follows some changes to the CA although the salient details of the pact remain largely intact. K Euro has an 80% stake in West Coast Expressway Sdn Bhd, with IJM Corp holding the balance 20%.

- To recap, the WCE CA announced last January broadly encapsulates:- (i) A 60-year agreement that comes with a government support loan (GSL) of RM2.2bil commencing 2013 @ 4% p.a.; (ii) Interest subsidy on commercial loans for 22 years.

- In return, the government is to share toll revenue in access of an agreed traffic volume on a 70:30. The ratio is to revert to 30:70 when GSL is fully repaid.

- Critics of the WCE had earlier said that apart from a near doubling of its original cost estimate, the RM7bil highway has the longest tenure among expressways in Malaysia. Other concerns centred on the GSL and interest subsidy accorded to the project. This had led to led to reports that the Attorney General’s (AG) Chambers were re-looking at the terms of the CA.

- We gather that K Euro has since explained to the AG that the CA’s terms are required to mitigate:- (i) its low traffic numbers (notably in coastal areas); (ii) difficulty in securing long-term funding; and (iii) a non-tolled stretch. In addition, the profit sharing ratio has been tweaked along within a shorter tenure.

- We see IJM as the biggest beneficiary of an imminent crystallisation of WCE’s CA, widely seen as the last remaining hurdle before the project actually takes off. IJM had just last month bought a 20% direct stake in WCE Sdn Bhd for ~RM7mil (total effective stake: ~43%), providing a boost to the funding viability of the highway. 

- Likewise, we believe IJM will likely participate in any fund raising exercise that K Euro is tipped to embark on to raise ~RM2bil for the WCE’s equity portion. K Euro is also reportedly planning to divest some of its assets for additional funds, including a 50% stake in Canal City and part of its interest in Trinity Corp (formerly Talam Corp).

- We foresee IJM as a frontrunner for over RM4bil worth of capex works for WCE, in addition to spin-offs for its other units:- (i) increased demand for large-diameter piles for ICP; (ii) improved accessibility to IJM Land’s upcoming Canal City project.  

Price- RM5.68

Fair value- RM7.23

[Source]