The RM55bil East Coast Rail Link (ECRL) could have been cancelled as quickly as the HSR and MRT 3, but due to legal and loan drawdown issues, further talks with China are needed.
KUALA LUMPUR: CIMB Equities Research is retaining its underweight call on the construction sector on sustained risks to rail contracts and remains bearish on all big-cap rail plays.
It said on Tuesday that post the 14th General Election and ahead of Pakatan Harapan’s (PH) first 100 days in government, 58% of the total value of mega rail projects has been cancelled, leaving projects that are significantly smaller in size and scale.
CIMB Research said that local news reports pointed to a mixed outlook for other rail contracts, even after the cancellation of the RM50bil to RM60bil KL-Singapore high-speed rail (HSR) and the RM45bil MRT 3 (Circle Line).
“For now, it is game over for the two projects but this does not seem to be the case for the RM4bil JB-Singapore Rail Transit System (RTS Line) and the RM9.4bn Gemas-JB rail double-tracking project.
“The RM55bil East Coast Rail Link (ECRL) could have been cancelled as quickly as the HSR and MRT 3, but due to legal and loan drawdown issues, further talks with China are needed,” it said.
News reports stated that cancelling the ECRL contract at this stage of progress (RM20bil loan drawn down and at 13% physical completion as of end-April) will result in the loan being defaulted and this will trigger a clause that requires the loan plus interest to be paid within three months of default.
Other contingencies include proposals to: 1) reduce the number of stations, 2) realign selected routes, and 3) stretching the project duration from seven to 15 years.
“We estimate the RM55bil cost may be trimmed by RM5bil to RM10bil (up to 20%), at least,” it said.
CIMB Research said after cancelling the HSR contract, new Transport Minister Anthony Loke shifted the attention to the bilaterally-driven RTS project benefiting Johor Bahru and Woodlands
(Singapore, 4km), which has been approved but requires cost revision before it takes off.
The Gemas-JB rail project has also been approved, but only in principle, with no indication as to whether it needs to be reviewed.
“We think the RM1bn cost/km for the RTS could be scrutinised,” it said.
CIMB Research said focusing on other smaller rail contracts is positive on the surface but it remains cautious on the potential outcome.
For the RTS and Gemas-JB rail contracts, the risk is that they could be subjected to review that scrutinises cost, project structure, funding, spillover to local contractors, including pre-agreed contract award terms under the previous Barissan Nasional administration.
“If both the projects get the final green light, they could be featured as part of the new government’s development expenditure (DE) in Budget 2019, in our view,” it said.
The research house said some contractors are of the view that the effective profit margins for scaled-down projects are unattractive and could benefit the EPCC/turnkey contractor more than sub-contractors.
“We concur with this view, as a scaled-down version of the ECRL limits room for price negotiations at the subcontractor level, and therefore could garner less interest if the 30% subcontract portion for local players is re-tendered. This scenario may come at the expense of contractors with execution capability and track record,” it said.
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