ECRL-linked construction stocks up

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: Following expectations of the East Coast Rail Link (ECRL) not being shelved, stocks of construction companies linked to the rail project rebounded yesterday.

An online portal disclosed that there is a heavy penalty imposed to terminate the project of some RM22bil, should the new government cancel it.

Hence, shares of construction companies such as Gabungan AQRS Bhd, George Kent (M) Bhd and Lafarge Malaysia Bhd, which are linked to the possible contract wins in the project, had showed a rebound.

Construction player Gabungan AQRS shares rose around 11% to 85 sen at 5pm when the market closed yesterday, from 76 sen in early morning trade.

As for George Kent, which was seen as a proxy for rail job rollout, its shares were up 9% to RM1.45 from RM1.33 when the market opened.

Cement player Lafarge Malaysia, which has secured a contract to supply cement for the ECRL project, rose 10.8% by midday to RM3.26, from RM2.94.

These construction stocks had a selldown after the 14th general election on May 9 on worries of the cancellation of rail projects by the new government.

Kenanga Research senior equity analyst Adrian Ng believed the rebound of the shares was “still low”, adding that the construction stocks selling was overdone since the general election.

He noted that the volatility of the construction counters would persist until a clear picture of the government finances are announced on the budget day, adding that some stability of stocks could occur after the 100 days of fiscal reforms by the new government.

“The dust has still not settled but the volatility will taper off once the Government announces its finances.

“However, the short and medium-term prospects for the construction companies is that earnings can be delivered due to their strong order book like IJM Corp Bhd and Gamuda Bhd,” Ng said.

As the volatility continues to take place due to the ill-fate of rail projects that have not been finalised, the Government hopes to renegotiate the terms for the ECRL project. The work for the rail project is about 13% completed.

This was echoed by Prime Minister Tun Dr Mahathir Mohamad’s post-cabinet press conference yesterday, saying “the ECRL project will be studied to see if we can either defer or terminate it.”

He added that the Government wanted to renegotiate the terms of the rail project as it could not afford to spend enormous amount of money at this point of time.

Dr Mahathir pointed out that the ECRL contract terms of the amount drawn did not commensurate with the level of work done, referring to the similarity of the contract terms of the RM9.4bil multi-product pipeline and Trans-Sabah Gas pipeline jobs.

In the case of the ECRL, around RM13bil has been drawn down.

“We found that the contract includes payment according to a specific time. So far, we can determine that the work done is much less than the payments that have already been drawn,” he said.