NOTHING seems certain in corporate Malaysia, especially when it comes to contracts on the award of jobs. Some contracts awarded under the previous government that was initially perceived to be up for grabs have been given back to the original contractors.
The latest is the multi-billion-ringgit Klang Valley double track phase 2 project where the contract has been reinstated to the original contractors – a joint venture between Dhaya Maju Infrastructure (Asia) Sdn Bhd (DMIA) and Lembaga Tabung Angkatan Tentera (LTAT) – at a reduced price of RM4.475bil.
The announcement by Transport Minister Anthony Loke on Tuesday put to rest a 10-month period of uncertainty with regard to the project that was awarded to the joint venture by the Barisan Nasional government a week before parliament dissolved.
In reinstating the job to DMIA-LTAT, the minister stressed on the sanctity of contract that the government had to honour in considering termination of old contracts.
Earlier this week, IJM Corp Bhd said its RM1.12bil contract for underground works on the light rail transit line 3 (LRT 3) project had been terminated.
IJM said its unit IJM Construction Sdn Bhd (IJMC) had received the notice of termination from MRCB George Kent Sdn Bhd (MRCB-GK) on July 8.
IJMC had been awarded the contract on March 13, 2018. Preliminary work had commenced before the project was suspended in June 2018.
“IJMC is currently consulting its advisers and will seek appropriate legal redress under the contract,” it said.
In line with the lower cost of the entire LRT 3 project that was scaled down to RM16.6bil from RM30.2bil, the portion that was to be done by IJM had been reduced substantially.
According to sources, the contract was reduced to about RM520mil as there is no underground station involved.
It is learnt that both parties have agreed on the pricing. However, the timing to complete the project is said to be an issue.
Sources say MRCB-GK felt there was no firm commitment from IJM Corp to complete the project within the stipulated time – estimated at two and a half years.
“However IJM Corp contends that timing is not an issue and it could meet the deadline as the tunnel does not require a completely new tunnel-boring machine (TBM). It needs a letter of award to start work,” sources tell StarBizWeek.
A completely new TBM would require about eight months to complete while a reconditioned machine would need only half the time.
Nevertheless, the termination of IJM Corp from the LRT 3 job came as a surprise, especially after a series of negotiations of the whole LRT 3 project in the last 12 months.
MRCB-GK is a joint venture between Malaysian Resources Corp Bhd and George Kent (M) Bhd.
Under the new terms, their mandate is to complete the LRT 3 project as the turnkey contractor with a fixed lump-sum payment of RM16.6bil by February 2024.
The client for MRCB-GK is Prasarana Sdn Bhd, which now comes under the Transport Ministry.
IJM Corp is seeking compensation for termination and the bill is likely to come from Prasarana.
Whether it is, the end of its involvement in the project is left to be seen.
IJM Corp received the contract in March last year and preliminary works had commenced before the LRT 3 project was stopped in June by the government due to ballooned cost.
After a revision, the Finance Ministry has approved the resumption of the project at a lower cost after reducing the number and size of stations, changes in specifications and reduced number of car train sets.
In the event a new party comes to take up the job, it is learnt that contractors from China are putting in strong proposals.
Market observers say works on the LRT 3 project have already resumed since May and the changes for all the work packages have been concluded. But IJM Corp’s package is still under review.
Cut in earnings forecast
The contract termination had seen some analysts downgrading their recommendation on IJM Corp.
MIDF Research has downgraded its call on IJM Corp to “sell” because the termination could obstruct further upside potential to its share price.
“IJM Corp will likely continue facing operational challenges stemming from the slowdown in property and plantation segments.
“Concurrently, we saw its share price has priced-in the improved sentiment of construction sector amidst the return of mega projects namely the East Coast Rail Link (ECRL) and Bandar Malaysia,” it says in a report.
According to Bloomberg data, analysts have varied recommendations on IJM Corp shares – there are five analysts giving “buy” call, eight “hold” and nine “sell”.
Since the announcement of the termination, IJM Corp’s share price has declined more than 3% to RM2.38.
On a year-to-date basis, the stock has done very well, rising more than 46%, in line with the other constructions counters on Bursa Malaysia that were boosted by the revival of mega infrastructure projects.
IJM Corp’s major shareholders are the Employees Provident Fund (EPF), Amanah Saham Bumiputera, Retirement Fund Inc and Urusharta Jamaah.
The EPF is the single largest shareholder in IJM Corp with about 15.5% stake.
MIDF says the change in the role of MRCB-GK JV from project delivery partner to turnkey contractor has allowed the two firms to participate in the works of LRT 3 projects.
“We will not be surprised if MRCB-GK decided to take over the work package.
“Another option which the turnkey contractor could adopt is calling for an open re-tendering of the work package.
“Taking the latter into consideration, we believe IJM Corp stands a fair chance of winning as a sub-contractor,” it says.
A source says other contracts are unlikely to be terminated from the LRT 3 project as the many contractors have agreed on the new contracts and some works have already resumed in May.
Analysts say the LRT 3 jobs made about 15% of IJM Corp’s total orderbook and would impact its earnings despite the reimbursement from the termination.
“Excluding the LRT 3 contract, IJM Corp’s earnings are expected to be reduced by 3%-4% in financial years 2020-2022, based on our earnings forecast estimates,” UOB Kay Hian Research says.
It has suggested a “hold” call on IJM Corp despite lower earnings estimate.
Strong construction order book
Excluding the LRT 3 contract, IJM Corp’s order book will stand at about RM6.7bil, mainly from its highway jobs in India.
Last year, IJM Corp secured jobs worth RM2.7bil in India. Earlier this year, the group bagged a contract worth RM1.5bil in India for the construction of the Solapur-Bijapur Highway on a 20-year build-on-transfer basis.
Aside from its billion-ringgit highway job in India, IJM Corp is building three towers at the Tun Razak Exchange – the new HSBC headquarters, Affin Bank Bhd’s headquarters and Menara Prudential.
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