MRT2 cost reduction remains negative for Gamuda


Analysts continue to expect downturn in contracts in 2019

PETALING JAYA: The final cost reduction for the Mass Rapid Transit Line 2 (MRT2) project remains a net negative for Gamuda Bhd with analysts continuing to expect a downturn in contracts in 2019.

CGS-CIMB Research, which retained its “reduce” call on the counter, noted that the RM3.6bil decrease in contract price for the MRT2 underground (UG) portion was less severe than its earlier base-case assumption of a RM6bil reduction or 60% cut to contract price.

“Putting this in perspective, the actual 38% cost reduction is still more than the maximum 22% acceptable quantum proposed by MMC-Gamuda JV in the earlier negotiation rounds,” it said.

On Friday, the Finance Ministry gave the green light on the continuation of underground works for the MRT2 project at a reduced cost.

Finance Minister Lim Guan Eng said in a statement that the Cabinet had accepted an offer by MMC-Gamuda to reduce the cost of the project’s underground works by RM3.6bil, or 21.5%, to RM13.11bil.

Earlier the joint venture had offered a cost reduction of only RM2.13bil, or 12.7%, for the underground works. For the above ground (AG) portion, the 23% cost reduction remains intact.

The research house noted the conversion of the RM12.1bil total reduced outstanding value translated to RM6.1bil for Gamuda based on its 50% JV share.

It raised its FY19-FY21 earnings per share (EPS) by 3.5-7.4% and its end-2019 target price by 13 sen to RM2.30 as it imputed a less negative outcome for the project.

UOB Kay Hian Research noted that the anticipated cost savings for the UG section was underpinned by reduced scope of work coupled with the removal of two stations, and that margins will be squeezed to mid-single digits of 5%-6% compared to 15% previously.

“The reduced margins will result in Gamuda realising lower earnings than anticipated (versus prior to termination) in the coming quarters, resulting in overall blended margins of high single-digit levels at over 7%, as guided by the company,” it said in a note.

The research house, which upgraded the counter to Hold, also raised its earnings forecasts by 13%, 12% and 15% for FY19-FY21 respectively. “Meanwhile, our annual zero orderbook replenishment for FY19-FY21 and lower turnkey role management fees assumed at 4% remains unchanged,” it said.

Maybank Investment Bank Research said Gamuda was still expected to see negative earnings growth in FY19-FY21 despite the earnings accretion from the underground package.

“Overhang remains on its future orderbook replenishment and highway concessions.

“However, a replenishment wildcard could come from the Penang Transport Master Plan (PTMP),” it said. The research house upgraded the counter to “hold” from “sell,” but lowered its target price to RM2.70 from RM2.90 due to its discount peg on the group’s concession business. It added that the shelving of two stations in Bandar Malaysia was insufficient to provide the RM3.6bil cost reduction and expects the remaining UG package to be completed at relatively lower margins.

Construction , gamuda