3 winners from the Kuala Lumpur-Singapore high-speed rail cancellation

If you had pictured yourself having breakfast in Kuala Lumpur, attending a meeting in Singapore later in the afternoon and getting back to Kuala Lumpur in time for dinner using a high-speed rail, this dream has been shattered as the multibillion-dollar Kuala Lumpur-Singapore high-speed rail (HSR) contract has been terminated.

The 350-kilometre HSR link was initially expected to bring the travel time between Singapore and Kuala Lumpur to 90 minutes from more than three hours by flight and around five hours by car.

Both countries could not come to an agreement regarding several changes sought by the Malaysian government in light of the COVID-19 pandemic. One included Malaysia’s proposal to remove an assets company in the HSR which was mentioned by the Singapore Transport Minister Ong Ye Kung as a ‘fundamental departure’ from the original agreement.

Malaysia’s Minister in the Prime Minister’s Department for Economic Affairs Datuk Seri Mustapa Mohamed also highlighted that the termination was timely as the Malaysian government faced financial constraints and had to allocate additional resources to combat the economic fallout that was caused by the pandemic. Malaysia will compensate an undisclosed amount to Singapore that is estimated to be much less than S$270 million.

The discontinuation has drawn heated debates from the public and politicians in Malaysia. While the Malaysian minister has brushed off allegations of cronyism for the cancellation, some attributed the cancellation to the issue of sovereignty. As a Malaysian myself, I feel more transparency is indeed needed from the Malaysian government.

Certain companies will not be too satisfied with the outcome. For instance, Genting Malaysia would have gotten its Resorts World Genting more visitors from the rail link if it had been built. The ripple effect on property and infrastructure counters in central Peninsular Malaysia is now gone as towns like Muar where HSR stations were supposed to be located at are less accessible to investors.

On the flip side, there are also potential winners from this cancellation. Here are three companies that are listed on Bursa Malaysia that stand to benefit from the HSR cancellation.

1. AirAsia Group

AirAsia Group Berhad is the largest low-cost carrier in Asia. It owns a 49% market share in its home market in Malaysia. It recently restructured its business activities into two pillars: Airline and AirAsia Digital. The move is timely to cope with the evolving consumption patterns since the onset of the pandemic.

The company aims to offer consumers a wide variety of services including travel-focused and other offerings such as food delivery, grocery delivery, and even non-AirAsia flights under its super app, airasia.com.

AirAsia Digital made up 6% of the group’s revenue in 2019 and the contribution is expected to rise to 50% by 2025 according to the management. It is still a plan for now as the group grapples with COVID-19. In 9M 2020, the group’s revenue declined by 70.2% year-on-year and posted a net loss of RM2.6 billion.

AirAsia may benefit from the HSR falling through as the Kuala Lumpur-Singapore route is one of the busiest international routes in the world. In 2018 alone, this route contributed to 4% of AirAsia’s passenger traffic out of a total of 44.4 million passengers it carried and 362 routes that it flew. As the pricing of a rail ticket would be on par with a flight ticket, the rail and the airline can be said to be quite close substitutes. The lack of a rail substitute as the HSR gets scrapped will bode well for airlines like AirAsia.

2. Malaysia Airports Holdings

Listed in 1999, Malaysia Airport Holdings Berhad (MAHB) operates and manages 39 airports in Malaysia and Sabiha Gökçen International Airport in Istanbul, Turkey. The group’s Aeronautical segment consists of mainly passenger service charges as well as aircraft landing and parking charges collected from airlines.

Sources of the company’s Non-aeronautical revenue include rental of space (retail), advertising, and carparks. It also operates Eraman, a retail chain that sells a wide range of duty-free and non-dutiable goods at its airports. These three segments made up of 94.5% of MAHB’s revenue in 2019.

Revenue registered a decent compound annual growth rate of 7.7% between 2015 and 2019. MAHB’s net profit was increasing but it posted net losses in 2015 and 2016 as shown below because of increased interest as well as depreciation and amortisation expenses since 2015. Additional loans were drawn down to partially finance the construction of KLIA 2.

Source: MAHB annual and quarterly reports 

The number of passengers carried through the Kuala Lumpur-Singapore route in 2018 was estimated to be at least 3.2 million. The amount made up of approximately 5.3% of KLIA 1 and 2 and 2.4% of the company’s total passenger traffic. MAHB will continue to be the gateway to world in Malaysia and Kuala Lumpur as the HSR fell through.

No station was planned at KLIA according to the original HSR proposal. Interestingly, the Malaysia government wanted to connect the KLIA to the HSR but the suggestion was not discussed. In that case, it could have boosted MAHB too since the accessibility to KLIA would have been greater from Singapore.

3. Konsortium Transnasional

Listed in 2007, Konsortium Transnasional Berhad (KTB) is the largest bus operator of stage and express buses within Peninsular Malaysia. KTB owns more than 1,500 buses that services 60 million passengers each year across major cities and towns throughout Peninsular Malaysia. It owns the largest market share in the express bus industry in Peninsular Malaysia. It owns a number of bus brands ranging from Transnasional, Cityliner, Plusliner, and Nice that cover more than 250 routes including Singapore.

The intercity express bus services including the Kuala Lumpur-Singapore route contributed to 75% of the company’s revenue in 2019. Since the HSR was aborted, passengers would only be down with two choices — to either travel by air or by road. KTB may continue to benefit from the termination of the HSR as express buses will remain as a viable option for cost-conscious passengers.

Source: KTB annual and quarterly reports

However, the impact of the HSR on KTB is less of a concern given the company’s questionable ability to tide over the economic fallout from the COVID-19 pandemic.

In fact, KTB has been loss-making in the past five years. It is classified as a PN17 company and is in the process of formulating a regularisation plan. Its auditors have also highlighted a material uncertainty regarding the company’s ability to continue to operate.

Since the beginning of the Movement Control Order (MCO) in March 2020, the number of ticket cancellations and refunds have spiked. As a result, KTB’s revenue in the first nine months of 2020 dropped by 74.0% year-on-year while net loss excluding extraordinary items widened from RM18.3 million to RM55.6 million over the same period.

The fifth perspective

These three companies will benefit from the HSR cancellation as they are likely to maintain or grow their Kuala-Lumpur-Singapore revenue over the long term, all else being equal, although the HSR cancellation may not be an immediate growth catalyst for them. In the case of KTB, the boost from the HSR cancellation is unlikely to turn the company around on its own and I would avoid it as an investment despite the good news for them.

Despite the ease of travel restrictions, Malaysians are still reluctant to travel domestically. In January 2021, MCO 2.0 was reimposed on a large part of the country including the Klang Valley. The pandemic will continue to be a great challenge to these companies in the short to medium term.