Construction & Material Sector At A Hive Of Activity In Johor, Suncon Seen As Best Contracts Proxy, Says CGS

CGS International (CGS) Sector Note cited today (May 9) that Johor Bahru-Singapore RTS construction was in full swing while details on SEZ appear imminent.

The JB-SG Rapid Transit System (RTS) progressing well

CGS said a meeting with some fund managers and Iskandar Regional Development Authority (IRDA) showed strong activity in Johor, likely driven by expectations of greater clarity on the Southern Economic Zone (SEZ), high data centre demand and RTS impact driving property interest.

CGS believes site progress on the RTS looked encouraging, with construction 70.5% completed as at end Mar-24, exceeding its target by 3% pts, according to the transport ministry.

The RTS demonstrates the government’s commitment to project timelines as IJM and Suncon were hired as step-in contractors to enable timely completion. This also dovetails with our thesis that future large-scale government projects will be led by contractors that have strong execution track records, CGS said.

Meanwhile, Suncon’s and Kimlun’s precast plants are running at full capacity, according to the companies. IRDA: Johor ART urgency and abundance of DC investments IRDA said it targets to achieve cumulative investments of RM636bn by 2030F (vs. RM413bn over 2006-Dec-23).

The agency also said committed data centre (DC) supply in Johor amounted to 600MW as at Dec 23 and 1,000MW as at April 24.

This ties in with CGS’s sector report and a Mar 24 global report by DC Byte that flagged Johor as the fastest growing market within Southeast Asia, with over 1.6GW of total supply as of Feb 24.

According to IRDA, the state government has initiated more comprehensive guidelines on DCs since late-23 to account for, among other things, the increasing supply needs for water and electricity, which are essential to running a DC.

There are plans to build a new dam, increase water catchment areas and encourage operators to design complexes that use less energy.

In IRDA’s view, it is crucial that the Autonomous Rail Rapid Transit (ART) is rolled out; it may replace the LRT and could be key to the success of the SEZ as the ART will help disburse passengers once the RTS is completed in end-2026F.

Given cost advantages and a shorter construction period, the ART may have an advantage over the LRT, CGS said.

CGS believes there could also be integration with the KL-SG HSR and Senai Airport.

In Mar 2022, Ancom, Nylex and LBS Bina announced to Bursa Malaysia that they had formed a consortium to propose the building of an LRT in Johor.

Suncon best proxy for Johor contracts

CGS likes contractors with strong execution track records and economic moat, such as Gamuda, Suncon and Econpile. They believe Suncon is the best proxy for Johor contracts; it has a first mover advantage in Johor, particularly for DC, while two Johor projects contributed 25% of its orderbook of RM6.9bn as at Mar 24.

 In addition, it is able to leverage its parent company’s strong presence there, with c.1,800 acres land bank for potential contract flows.

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