CIMB Research cautious on construction after MRT 2 review

  • Analyst Reports
  • Monday, 08 Oct 2018

The RM50m contract for Metronic Global is more than 125% of its latest annual published consolidated revenue.

KUALA LUMPUR: CIMB Equities Research is retaining its underweight recommendation on the construction sector on news the Ministry of Finance would terminate MRT 2’s underground contract, replacing it with an international tender. 

It said on Monday the cost for MRT 2’s above-ground portion will be cut by 23% to RM17.4bil with no cancellation of stations. MMC-Gamuda JV will play a turnkey role.

“Termination of MRT 2’s underground scope is a negative surprise. Huge order book impact if Gamuda fails in the soon-to-be-held international tender,” it said.

CIMB Research said pending more details of MRT 2 cost rationalisation and the termination/re-tendering of the underground scope, this news could also impact the order books of other MRT civil work contractors (albeit not as significantly as Gamuda), namely, among the players under its coverage, IJM Corp, Sunway Construction, WCT and MRCB.

“In our view, despite Gamuda’s cost/logistical advantage, it remains to be seen if the company will be able to prevail in the international competitive tender rounds, which are likely to feature Chinese contractors too. 

If Gamuda fails to re-emerge the winner in the international re-tender rounds, the research house estimates 18%-20% downside to FY19-21 EPS forecasts (assuming zero new wins per annum) and 25-30 sen downside to the target price.

“Maintain sector Underweight. With this news, we retain our Reduce call on Gamuda (top sell given negatives from MRT 2) and flag more downside risks to EPS and TP.

As for IJM Corp Bhd, it has a hold call and target price of RM1.84. Its closing price was RM1.79.

IJM Corp is among the larger work package contractors for MRT 2. It secured the RM1.5bil viaduct and stations package, with zero exposure to the underground scope.

CIMB Research has a hold for  YTL Corporation with a target price of RM1.40. Its closing price was RM1.25. 

“YTL Corp has zero exposure to MRT 2. It remains the biggest play on the RM8bil-RM9bil Gemas-Johor Baru rail double tracking project, which has been allowed to proceed at a lower cost. 

“YTL, via YTL-SIPP JV, has emerged as the main turnkey contractor,” said the research house.
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