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Political uncertainty and funding constraint remain key hurdles for MRT 3, say analysts

KUALA LUMPUR (April 5): While the roll-out of the Mass Rapid Transit Line 3 (MRT 3) augurs well for the construction sector, some analysts remain sceptical about the project due to political uncertainty and government funding constraint.

Hong Leong Investment Bank (HLIB) Research said in a note today that the development of MRT 3 would serve as an upside catalyst for the sector, but it reckoned that uncertainties regarding the timeline as well as hurdles on various fronts (political, funding, etc) remain key concerns.

“As such, for the time being, we maintain our 'neutral' stance,” it said.

It also estimated that the project cost should fall in the range of RM20 billion to RM22 billion with one-third of the alignment being underground.

“Based on our understanding, several key issues including funding remain unresolved.

“Additionally, we note that 2H21 (the second half of 2021) might see an end to the current state of emergency, which could spell further fluidity on the political front. We view this as key risks towards project implementation,” it said.

AmInvestment Bank Research analyst Joshua Ng, who upgraded the construction sector to "neutral" from "underweight" after the Cabinet gave the green light to proceed with the MRT 3, also had reservations about the project.

“The local political landscape remains dynamic, with a strong likelihood of the 15th general election (GE15) being called immediately after the lifting of the nationwide state of emergency on Aug 1, 2021,” he said.

Given the government’s fiscal constraints, he also opined that the implementation model of the project may gravitate towards a public-private partnership, of which the main contractor may be required to take on certain operating/commercial risk and/or participate in the funding of the project (the East Coast Rail Link and Island A of the Penang Transport Master Plan are good examples).

“The construction period may be prolonged to lighten the stress on the government’s cash flow, which means the earnings impact of the MRT 3 project on construction companies may not be as significant as compared to the MRT 1 and MRT 2,” he added.

The transport minister’s statement on the MRT 3 project aside, Ng said the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the Covid-19 pandemic (including reduced tax and petroleum revenues) as well as the massive relief spending to cushion the economic impact of the pandemic.

UOB Kay Hian analyst Muhammad Afif also said that due to the lack of visibility of the project's land acquisition, alignments, designs and environmental impact assessment (EIA) status progress, it would be tricky to pin down an expected date for the tender process to start.

He noted that the previous MRT 2 project took about one year from the government's approval to the award of contracts or the groundbreaking ceremony.

“Besides that, the government's finances and political situation remain our key concerns as these could delay the project's roll-out timeline,” he said.

Hence, he is not making any changes to his earnings forecasts or recommendation until he sees a more tangible and certain timeline.

Meanwhile, CGS-CIMB analyst Sharizan Rosely said based on his rough estimates, the revised MRT 3 proposal may see cuts of 30% to 40% in the total original cost of RM45 billion due mainly to a reduction in certain underground scopes.

This could bring the total estimated revised cost to between RM27 billion and RM32 billlion, he added.

“The Cabinet approval lifted the overhang on the MRT 3 project but the speed of implementation, in our view, hinges on the finalisation of the funding structure beyond the RM15 billion direct allocation for new public transport projects under Budget 2021.

“Whether the new MRT 3 comes with a private finance initiative (PFI) given the government’s limited room for a direct infrastructure funding model remains to be seen,” he said.

To reflect the improved trading sentiment towards construction stocks on the back of the latest news, AmInvestment Bank’s Ng raised his benchmark forward target price-earnings ratio (PER) for large- and mid-cap contractors to 14 times from 12 times (except for Gamuda to 13 times from 11 times to reflect its riskier order book with self-funded reclamation works for Island A of the Penang Transport Master Plan) and for small-cap contractors to nine times from eight times.

“As a result, we raise the fair values (FVs) of construction stocks under our coverage by 6% to 17%. We upgrade Sunway Construction Group Bhd (SunCon) to 'hold' from 'underweight', while maintaining 'hold' for Gamuda, Hock Seng Lee Bhd and Kimlun Corp Bhd, and 'underweight' for IJM Corp Bhd and Econpile Holdings Bhd,” he said.

Ng does not have any top pick for the sector. However, for the purpose of anchoring a portfolio, he recommended Gamuda ("hold"; FV: RM3.49) and SunCon ("hold"; FV: RM1.80).

As for HLIB Research, IJM Corp ("buy"; target price [TP]: RM1.95) is its top pick in the large-cap space as a potential beneficiary of the government’s infrastructure pump-priming spurred by its breadth of rail-related construction experience.

“Against this backdrop, the company trades at an attractive price-to-book value of 0.63 times,” it said.

Within the mid-small cap space, it continued to like SunCon ("buy"; TP: RM2.01) due to its strong balance sheet, extensive track record of infrastructure projects and strong support from its parent company.

UOB Kay Hian’s Muhammad Afif, who maintained "market weight" on the sector, opined that the positive news flow will provide trading opportunities to potential beneficiaries, such as Gamuda, IJM Corp, Malaysian Resources Corp Bhd (MRCB) and SunCon.

CGS-CIMB’s Sharizan reiterated his "neutral" call on the sector and "add" calls on Gamuda, IJM Corp, MRCB and WCT Holdings Bhd as potential MRT 3 winners.

“Gamuda is our top play for the revived MRT 3 project,” he added.

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