CIMB Research underweight on rail sector after smaller scale LRT3

KUALA LUMPUR: The Ministry of Finance’s (MoF) decision to scale down the LRT 3 project (Bandar Utama-Klang) is a short-term reprieve for the contractors involved but is still net negative.

It said on Friday the eventual contract value and prevailing margins for all work package contracts (WPCs) as a result of the scaling-down phase could be lower, both for the project delivery partners (PDP) joint venture and contractors.

“There could be short-term trading opportunities on bombed-out LRT 3 contractors like MRCB, IJM Corp, WCT, George Kent and Gabungan AQRS (not rated) but we remain negative on the overall rail outlook in 2H18 and retain Underweight on the sector,” it said.

On Thursday the MoF announced that the revised all-in cost of the LRT 3 project was RM16.6bil, a 48% reduction from the original all-in cost of RM32bil. The completion date was extended by four years to 2024.

According to the MoF, the new cost estimates translate to RM15bil in savings.

CIMB Research said what is more relevant to contractors is the value of the WPC which is part of their order book. Previous estimates valued the WPC at RM9bil for the entire LRT 3 project.

The LRT 3 will be restructured from a PDP model to a “fixed-price contract”. This implies that any deviation from the fixed cost will be borne by the PDP company. 

Details of any changes to the PDP contract awarded to the MRCB-George Kent JV will be disclosed later.

“We think it would be premature to assume that a ‘fixed price’ contract implies a better deal for the PDP company, given the unknown WPC value. The value of the WPC can only be made known or estimated after the completion of the revised packages.

“The cancellation of the 2km underground tunnel will impact IJM Corp, as the tunnel’s
RM1bil contract value makes up 11% of its RM9.4bn outstanding order book.

“However, we note that IJM’s cancelled underground scope may be replaced by new specs at a lower cost. This also means that IJM may end up with a lower value contract, rather than no contract at all.

“The cancellation of stations will be negative for WCT as the overall two WPCs it won contain the building of four LRT stations. The cancellation of stations will strike out one of the four stations under its order book.

“The downsizing of the train depot would have a minimal impact on WCT as phase 1 of the Johan Setia depot is near completion. Cost cutting on the depot packages is likely to impact the remaining phase(s) of the depot construction, which are not under WCT’s order book. 

“As for Sunway (via Sunway Construction), the lower number of LRT 3 stations would not impact its package, while the impact on Muhibbah’s noise barrier package is expected to be minimal,” it said.