Positive pre-election newsflow for KL-Singapore HSR, says CIMB IB Research

KUALA LUMPUR (May 4): CIMB IB Research retained its overweight call on the construction sector and said the key sector risks are execution delays and competition from foreign contractors. 

In a report yesterday, CIMB said other potential sector catalysts include the award of the RM9.4 billion Gemas-JB rail double-tracking project to YTL Corp Bhd and a decision on the EPCC scope of the RM40 billion to RM45 billion MRT3, which could benefit Gamuda Bhd. 

Meanwhile, CIMB IB maintained its earnings forecast for Gamuda, Malaysian Resources Corp Bhd (MRCB) and YTL Corp Bhd, pending the finalisation of contract value, PDP fees and the timing of construction works. 

“MRCB-Gamuda Joint-venture (JV) (50:50) and YTL-THP JV (70:30) had received the Letter of Award (LOA) for their respective Project Delivery Partners (PDP) scopes. 

“The announcement had formalised the letter of intent (LOI) received by both JVs early this month,” the research house stated. 

CIMB IB said MRCB-Gamuda JV’s North Package Project covers the alignment from the Bandar Malaysia terminus station to the first standard viaduct pier on the south side of the Melaka station.

“YTL-THP JV’s South Package takes over from there (Melaka station) to Malaysia-Singapore border,” it added. 

Moving forward, while the fee of the PDP contract value was not disclosed, CIMB however estimated combined value of the two PDP scopes to be about RM30 billion to RM40 billion. 

“We assume that MRCB-Gamuda JV’s undertakes a larger PDP contract value (despite a shorter rail length, versus YTL-THP JV’s portion), given possible underground and above ground works. 

“From the proposed High Speed Rail (HSR) rail line, we estimate that MRCB-Gamuda JV’s PDP coverage makes up less than half of the 350km HSR track length,” the research house stated. 

CIMB IB estimates RM97.5 million to RM130 million per annum (p.a.) in PDP profit for each Gamuda and MRCB over six years, given the assumption of 6% PDP fee and a straight line contract recognition. 

“This could boost MRCB’s FY19F net profit by 51% to 68% and Gamuda’s FY7/20F net profit by 7% to 10%. YTL’s share of PDP profit will range from RM73.5 million to RM98 million p.a., equivalent to 7% to 9% of its FY6/20F net profit,” it stated. 

Additionally, if the PDP fees is at 5%, Gamuda’s and MRCB’s PDP profit could amount to RM81.3 million to RM108.3 million p.a. each, CIMB IB added. 

“For MRCB, this bumps up its FY19F net profit by 42% to 56% on a straight line basis, while Gamuda’s FY7/20F net profit could be raised by 6% to 8%. 

“YTL will net a PDP profit of RM61.3 million to RM81.7 million p.a., boosting its FY6/20F net profit by 6% to 8%,” it said. 

PDP companies can tender for civil works, CIMB IB said. However initial civil works awards to local contractors are likely to take place from early-2019 onwards.

“Compared to MRT PDP, there is a likelihood that HSR PDP companies may be able to participate in actual construction works, but we believe this could be limited to selected portions,” the research house added. — theedgemarkets.com

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