Water – Shimizu-led consortium wins tunneling job

It was reported in the news that Shimizu consortium which includes Nishimatsu, IJM Corp and UEM Builders Bhd through 30:30:20:20 joint venture had won the tunneling job for Pahang-Selangor water transfer project (Lot 1-1). IJM in its announcement yesterday quoted that the tunneling job worth RM1.3b and the construction will take about 5 years time to complete.



· Positive development for water sector. We view this news as a positive development for the water sector as it will provide more certainty in the long awaited Pahang-Selangor water project and hence a crucial development to move the water industry which has been in an uncertain period for a long time especially for the steel pipes manufacturers. The works involved the construction of 45km tunnel. To recap, apart from Shimizu, Taiseh Corp and Kajima are the other bidders for the project.

· The project cost RM1.3b came slightly lower that our expectations. In our previous sector report dated 13th April 2009, we expect the project to cost RM1.5b which is slightly higher than the sum of the contract awarded to Shimizu. We also understand that Shimizu was the lowest bidder for the project followed by Taiseh Corp. At first, Shimizu’s in its bid, attached the VO clause which we think could inherited some cost overrun risk in our perspective. On the financing part from Japan Bank for International Cooperation (JBIC) is providing the loan up to RM2.5b for the project. We expect the construction will take off anytime soon this year.

· Tunnel aside, Langat 2 in the making. The implementation of Langat 2 project will definitely be a re-rating catalyst for the water industry players especially in Selangor. The construction and maintenance of water reservoirs and water treatment plant contract is to be awarded to local companies through an open tender as referred to PAAB. We understand that most of local water players like JAKS Resources Berhad (JAKS) and Salcon Bhd has been eyeing for the construction and the pipe laying works for quite sometimes as they have the capacity and track record to supply the pipes for water related projects.

· Selangor water restructuring a laggard issue. At present, there are no positive developments for the Selangor water restructuring as the recent the meeting between Datuk Peter Chin of KTAK and Tan Sri Khalid leaves the issue unsolved. At this juncture, the ability of the federal government to come up with better offer and award of O&M license to the existing players will likely end the industry restructuring issues. We are maintaining our BUY call for Puncak with the target price of RM3.86.