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12MP: Sizeable GDE allocation, plus 3 priorities of interest

MYR400b GDE + PPP + highway + water

Although there was no mention of new major infra projects in the 12MP blueprint, the sizeable MYR400b GDE allocation (+61% vs. 11MP spend) do imply considerably high levels of construction activities during the 12MP period with potentially hefty bump-ups in 2023-24, when the GDE could peak. Three priorities in the 12MP blueprint interest us: (i) a new PPP blueprint; (ii) restructuring the model for highway development; (iii) adoption of a comprehensive water transformation agenda.

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Reaffirms our anticipation for two major trends

A new public-private partnership (PPP) blueprint and restructuring the model of highway development under the 12MP reaffirm our anticipation for two major trends in the sector: (i) that new major infra projects to be taken on via the private finance initiative or deferred payment financing model; and (ii) highway concessions to be restructured – both to alleviate the government’s fiscal burden [link]. We expect the KVMRT3 project to take on this new PPP model, with the private sector to take on the larger
financing responsibility. As for tolled highways, a ‘highway trust’ or even a ‘highway REIT’ model could be the considerations.

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Water transformation to lead to higher investments

The 12MP lays the foundation for a comprehensive water transformation agenda by accelerating the adoption of the Integrated Water Resource Management while the larger plans include establishing a single water management agency, promoting innovative financing mechanisms, and introducing a Tariff Setting Mechanism to ensure financial stability. If successfully implemented, the water transformation agenda should lead to higher investments in the sector, which have been lacking.

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Beneficiaries; GAM, IJM & LTK as preferred BUYs

The sizeable MYR400b gross development expenditure (GDE) allocation do imply considerably high levels of construction activities ahead, which should benefit most in the engineering & construction (E&C) sector including their supply chain. A new PPP model will benefit E&C players with strong balance sheets, while a revised model for highway development could enable existing concessionaires to unlock values.
There is no change to our sector (NEUTRAL) and stock calls; our preferred BUYs are GAM, IJM and LTK.