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Nikkei Markets

Malaysia to review DRB-Hicom unit's contract

Forms four-member panel to revise contract that runs until Aug. 31, 2024

Puspakom, a unit of conglomerate DRB-Hicom, is the only comprehensive national vehicle inspection company appointed by the Malaysian government.(Photo from Puspakom website)

KUALA LUMPUR (Nikkei Markets) -- Malaysia Wednesday said it will review a vehicle inspection service contract that was awarded to conglomerate DRB-Hicom's unit Puspakom as the new administration ramps up efforts to tighten government finances.

Since sweeping to power in a shock May 9 election outcome, the Alliance of Hope coalition government has announced plans to examine several contracts, which it considers costly, as part of its initiative to plug leaks in massive state-funded projects.

Earlier Wednesday, Deputy Transport Minister Kamarudin Jaffar told reporters in parliament that the government plans to review Puspakom's vehicle inspection services contract and expects the revision to be completed by this year-end.

A four-member special committee - headed by Economic Affairs Minister Azmin Ali with Transport Minister Anthony Loke, Agriculture and Agro-Based Industry Minister Salahuddin Ayub and Health Minister Dzulkefly Ahmad as members - will revise the current contract that runs until Aug. 31, 2024, Kamarudin said.

"We will be looking into various factors including both financial and legislation," Kamarudin said. "We are looking at all possibilities including opening up the service, to counter Puspakom's monopoly."

Puspakom, a unit of conglomerate DRB-Hicom, is the only comprehensive national vehicle inspection company appointed by the Malaysian government to undertake all mandatory inspections of both commercial and private vehicles.

The proposed Puspakom review comes a day after Deputy Education Minister Teo Nie Ching said her ministry plans to review the contract for the 1BestariNet - a government school internet project - once the current tenure ends on Jun. 30, 2019.

Analysts said the reviews, if followed through, will likely weigh on earnings of YTL Power International, which owns 60% in the loss-making YES Communications that runs the 1BestariNet project, and DRB- Hicom to a lesser extent. YTL Power is the utilities arm of conglomerate YTL.

"The news flow is negative for YTL Power and we expect share price to soften in the interim," said UOB Kay Hian's analyst Chong Lee Len. "In the absence of contribution from 1BestariNet, assuming the government unwinds the five-year rolling contract, the losses from YES will widen."

For DRB- Hicom, the impact from a review of Puspakom's monopoly will be less painful as contribution from the business to overall revenue remains negligible.

Hong Leong Investment Bank Analyst Daniel Wong estimates that Puspakom contributes up to 15 million ringgit annually to DRB- Hicom's net profit.

YTL Power shares ended 2.5% lower at 1.19 ringgit apiece and DRB- Hicom added 0.9% to 2.24 ringgit, while the benchmark FBM KLCI ended 0.2% higher.

--Gho Chee Yuan and Chong Sin Hao

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