PETALING JAYA: GAMUDA BHD and MMC Corp Bhd’s shares tanked, following the government’s announcement that its joint-venture (JV) company had been terminated as the contractor for the underground portion of the Mass Rapid Transit Line 2 (MRT2) project.
Both companies saw some RM1.93bil (Gamuda) and RM671mil (MMC) being shaved off from their market capitalisation in yesterday’s trade.
Gamuda ended the trading session at its seven-year low, plunging 78 sen or 24.3% to RM2.43, while MMC ended at its 9½-year low, dropping 22 sen or 16.3% to RM1.13.
Gamuda was the most active stock on Bursa Malaysia yesterday.
Falls in these construction giants had also affected sentiment in the broader industry, with stocks such as IJM Corp Bhd falling 19 sen or 10.61% to RM1.60 and SUNWAY CONSTRUCTION GROUP BHD declining 19 sen or 10.86% to RM1.56.
It was reported that the government had reduced the construction cost of the elevated portion of the MRT2 project by 23% or some RM5.22bil from the original cost of RM22.64bil.
The underground portion of the MRT2, which saw MMC-Gamuda’s contract being terminated, will be re-tendered via an international open tender exercise.
MMC-Gamuda will also be appointed as the project’s turnkey contractor instead of a project delivery partner (PDP).
Analysts said the latest development is highly negative for Gamuda.
UOBKayHian Research (UOBKH) said in its report that this development would erode more than 90% of Gamuda’s current outstanding order book.
“We have cut Gamuda’s financial year 2019 (FY19)-FY21 forecast earnings by 32% annually following the contract termination of the MRT2 underground tunnel. We exclude the remaining RM5.5bil of MRT2 works from our assumption, leaving Gamuda’s outstanding book at RM500mil from the Pan Borneo Highway project only,” UOBKH said.
“Also, we have excluded our annual order book replenishment of RM500mil for the FY19-FY21 forecast on the back of less government infra-related jobs to be dished out in the near term. Historically, Gamuda relies heavily on government-related projects,” it added.
Commenting on MMC-Gamuda’s new role as the project’s turnkey contractor, the research house said the JV company could see its margins being maintained.
“The JV can potentially maintain the effective margin equivalent to its former PDP fees by putting a mark-up plus reimbursable fees as the turnkey contractor responsible for the delivery of the project, and also assuming the construction risks, including the financing risk,” UOBKH said.
It expects the turnkey role management fees to contribute around RM50mil-RM60mil annually based on a 4% management fee compared to 6% previously under the PDP structure fees.
“Excluding the MRT2 contract, our revised sum of parts (SOP)-based target price for Gamuda is RM2.37. Our target price is based on a 20% discount (through the valuation methodology) to our SOP valuation of RM2.96 per share and implies 13.7 times the FY20 forecast price-to-earnings ratio,” UOBKH said, downgrading the stock to a “sell”.
For MMC Corp, UOBKH said the company’s earnings forecast has been cut for the 2019-2020 period by 35% annually on the latest developments.
The research house said it has also excluded the remaining RM5.5bil of MRT2 works from its assumption.
UOBKH has maintained its “hold” rating on MMC, with a lowered target price of RM1.50 per share.
“Our target price is based on a steep 50% discount to our SOP valuation of RM3.00 per share. We note that the group‘s port assets account for the bulk of valuation and earnings, as the engineering segment accounts for only 10% of our SOP-based valuation of RM9.2bil for MMC,” it said.
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