CIMB Research underweight on construction as LRT 3 scaled down

KUALA LUMPUR: CIMB Equities Research is retaining its underweight stance on construction stocks following news reports that the Light Rail Transit Bandar Utama-Klang Line (LRT 3) could be scaled down and taken over by Prasarana Malaysia Bhd, the project owner.

It said on Tuesday downsizing the LRT 3 will impact existing order books and margins. Contractors under coverage that have exposure to LRT 3 are Sunway (via SunCon; the biggest scope), WCT (three packages), IJM Corp (the only underground scope), Muhibbah Engineering (noise barrier) and EITA (elevator and lifts).

StarBiz reported Prasarana was considering taking over the rail system’s construction from the project delivery partner (PDP). The latter is a 50:50 joint venture (JV) between Malaysian Resources Corp Bhd (Reduce) and George Kent (Malaysia) Bhd (not rated).

The news report stated Prasarana plans to take over LRT 3’s construction after costs have risen from the reported RM9bil to over RM15bil.

The report said one idea mulled to slash the construction cost was reducing the size of the project. Other options being considered, sources said, included reverting to the turnkey model to complete the project.

In the worst case, the project could be shelved “given the current financial constraints” as the government aims to rein in its finances.

StarBiz reported the LRT 3’s overall cost had been estimated to be RM10bil when it was launched in September 2015. This comprised RM9bil for construction costs and an allocation of up to RM1bil for land acquisitions. At this stage, physical works are 10% completed.

Prasarana had the approval to raise up to RM10bil in debt to pay for the project. Going past the allocated budget will require the company to seek approval from the cabinet for additional funds.

MRCB is undertaking the PDP scope of the LRT 3 project, initially valued at RM9bil, via a JV with George Kent (50:50). The PDP JV has been receiving fees of 6% of construction cost, based on the progress of works done.

Sunway Bhd, via Sunway Construction (SunCon), secured the largest LRT 3 package (including two stations) worth RM2.3bil. The contract was awarded in October 2017.

WCT secured three LRT 3 contracts worth a combined RM1.7bil involving the depot, stations and viaducts. The group is the only contractor that bagged three LRT 3 packages in 2017.