CIMB Research sees Gamuda as big proxy for new rail contracts

KUALA LUMPUR: CIMB Equities Research is overweight on the construction sector and picks Gamuda as a major proxy for new rail contracts for rail contract in the secone half of 2017 with potentially RM10bil worth of job wins per annum over the next three years. 

It said on Wednesday its review of job flows based on Construction Industry Development Board’s (CIDB) data found 71% on-year deceleration in the value of contracts awarded in 1Q17. 

With the RM32bil MRT Sungai Buloh-Serdang-Putrajaya line (MRT 2) awards completed in 1Q17 and the timing of tenders for new large-scale contracts in 2H17, CIMB Research expects 2Q17 job statistics to be flat on-quarter at best. 

“We project a revival of sector job awards in 2H17, consistent with historical contract award trends. Rail should continue to be the main theme in 2H17. 

“Our updated value estimate of outstanding contracts in the pipeline works out to RM200bil, to be implemented from 2H17F onwards. New urban rail jobs which have been approved make up 50% of the total value. 

“Non-urban/interstate rail contracts (including the RM55bil East Coast Rail Link, ECRL, and the RM9bil Gemas-JB rail double tracking) constitute 35%, and the remaining 15% are other non-rail infra contracts. We estimate that 20% of the overall job value has a strong chance of being awarded in 2H17,” it said.

CIMB Research believes there is strong likelihood of sizeable infra-related job awards in 2H17 as major rail contracts are at the advanced stage of tenders. 

Major projects that are likely to be awarded are: 1) one to three smaller packages for the east coast portion of the ECRL, 2) a sizeable subcontractor package for the central portion of the ECRL, 3) 10-15 packages from the RM9bil LRT 3 (45% for bumi contractors), 4) one underground/ tunneling package for LRT 3 and the RM8bil Gemas-JB rail double tracking.

The research house sees minimal delay risks for new contracts in the pipeline, in view of the election year in 2018. 

“Key events investors should look out for in 2H17 are the AssetsCo tender for the KL-Singapore high-speed rail (HSR) in 4Q17, which should pave the way for the civil works tender in 1Q18, conclusion to the Bandar Malaysia request for proposal (RFP), and more details on new infra contracts from Budget 2018 in October which may include a prelude to MRT 3’s project approval expected in mid-2018 and ECRL’s sizeable tender structure,” it said.

CIMB Research said apart from the upcoming MRT 3 (Circle Line), it could emerge as one of the biggest contenders for the ECRL, LRT 3 (2km underground scope) and the civil works scope of the KL-Singapore HSR.  Based on its estimates, these four major rail projects have a combined value of over RM150bil. 

“We reiterate Overweight on the sector, with job delays and funding as key downside risks,” it said.
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