source: [BlackSpy fundamental]
IJM/KEuro
West Coast Expressway Sdn Bhd, a 64.2 per cent subsidiary of Kumpulan Europlus Bhd, will undertake the proposed construction of the West Coast Expressway, estimated to cost RM7.07 billion.
To enhance the viability of the project, the government would grant a Government Support Loan (GSL) of RM2.24 billion, commencing from 2013 at an interest rate of four percent per annum and an interest subsidy, of up to three per cent from commercial loans for 22 years. The terms of the GSL and the interest subsidy, would be finalised by West Coast with the Finance Ministry.
The toll revenue in excess of an agreed traffic volume would be shared on the basis of 70:30 between the government and West Coast till full settlement of the GSL and subsequently 30:70 after the settlement.
As for land acquisition, the cost of up to RM980 million would be borne by the government.
Meanwhile, construction works for the project would be implemented by West Coast through open tender. Europlus could give IJM Corp up to RM4 billion worth of job to help build the highway from Banting in Selangor to Taiping in Perak while the balance of the work will go for open tender to other contractors.
IJM's outstanding order book may rise up to RM10 billion, assuming it manages to secure half of the total project. This is also assuming that the New Pantai Expressway extension project will be awarded to IJM in the fiscal year 2013.
Excluding the West Coast Expressway project, IJM's outstanding order book stands at RM4.7 billion with the new Klang Valley Mass Rapid Transit project.
WCE is a 22.7 per cent associate of IJM.
The project, which is a build-operate-transfer (BOT) project with a concession period of 60 years, cover a distance of 316 kilometres from Banting in Selangor to Taiping in Perak. Of the total distance, 224 km will be tolled while 92 km will be toll-free.
The proposal involves a 60 year concession term.
On the face of it, the terms look positive for KEURO. But after stripping out the hype, a closer look reveals that the proposed financing structure is essentially one that would make the project comfortable to financiers.
It is structured in such a way that financiers would take some comfort in lending to the projects as the traffic flow for the highway alone (without the government support loan) will not justify its cost.
The cost of the project estimated at rm7.07 billion excludes the cost of the land acquisition at rm980 million that would be borne by the government. Assuming the project is done on 30% equity and 70% debt, the required loan amount will be about rm5 billion.
The group will utilise the rm2.24 billion government support loan with 4% interest which will incur interest payment of about rm89.6 million a year and take out a commercial loan of about rm2.76 billion with a likely interest rate of 8% to 9%.
The government has agreed to provide up to a 3% interest subsidy to West Coast for 22 years on its commercial loans, which would translate into rm82.8 million per annum. What this means is that the subsidy that West Coast will get for its commercial loan will almost equal to the interest in the government loan. Effectively, West Coast will not need to pay the government for its support loan. All the cash flow from the highway in the early years will go towards servicing the commercial loan which should be of some comfort to banks.
Assuming the commercial loan incurs an interest rate of 8%, stripping out of the 3% subsidy from the government, the interest payment on the rm2.76 billion loan will be about rm140 million pa. That amount will be easier to manage for a highway concessionaire.
Of interest is the sharing of toll revenue that is in excess of an agreed traffic volume on the expressway. The sharing basis between the government and West Coast will be 70:30 until the latter repays the loan from the government. After that, the sharing will become 30:70.
This will be to West Coast’s advantage as the 316 km expressway from Banting and Taiping – of which 224 km will be tolled – is not expected to see much traffic, especially during its early years.
What would be interesting is how KEURO, which has seen net losses in the last two years, will finance the equity portion of the project. Given its poor financial standing, it will be quite difficult for the group to take on the equity portion of rm1.5 billion to rm2 billion to fund the project. This is where IJM comes in. It has the balance sheet strength to see through the project.
The concession will pave the way for the eventual award of at least rm4 billion worth of projects to IJM. With the construction of WCE together with the MRT Package V5 contract, will help boost IJM’s outstanding order book by as much as rm6 billion.
The WCE will further complement IJM’s increasing number of concessions. With KEURO’s poor financial results, there is a good chance that the WCE will ultimately land in IJM’s stable.
The concession is significant as the WCE will be the second longest toll road in Malaysia . This would make IJM a serious toll road concessionaire.
The company currently operates three toll roads in Malaysia – Besraya Highway and New Pantai Highway , Kajan-Seremban Highway or Lekas. IJM also has three toll concession operations in India and a 21 year concession in Argentina . All its overseas toll concessions are seeing growing traffic flows and increasing revenue.
The group was awarded an extension project in April 2011 to add 10km to its New Pantai Expressway. The extension project is estimated to cost rm1 billion.
With the WCE concession finally firming up and a bankable structure behind it, this concession could provide IJM with positive recurring income.
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