Construction: MRT picks up steam

Construction sector
Maintain overweight:
The pre-qualification evaluation rounds for the Sungai Buloh-Kajang (SBK) MRT line are at the tail end, making way for the first series of tenders to be called this August. The ground breaking and launch of the mass rapid transit line will be held on Friday, July 8. Prasarana, the asset owner, and the Land Public Transport Commission (SPAD), the supervising authority, will lead the event.

The launch will take place at the KL Convention Centre and there may be concurrent ground breaking ceremonies at key sites, the proposed Sg Buloh MRT station and the Semantan and Cochrane tunnelling launch shaft areas. According to Prasarana, a key attraction during the launch is likely to be a full-length video presentation of the SBK line, which is an extended version of the video presentation featured during the Greater KL conference earlier this year. The video presentation will include detailed illustrations of the key stations along the 51km line.

The Sg Buloh station will be near the new township development on the Rubber Research Institute (RRI) land. It will function as a transport hub for cars, rail and buses. Recall that the RM23.9 million contract for the Sg Buloh depot and earthworks (Phase 1) was awarded to Gadang Holdings Bhd on June 11.

Another key station will be located at the Curve shopping mall. It will be an elevated station with easy access to retail spots and residential areas. The Section 17 station will be a bigger station located along the Sprint highway and near offices and townships. It will feature a multi-storey car park and F&B outets. The MRT station at KL Sentral will be underground and will be located between the Hilton/Le Meridien and the national museum. The MRT station at Bukit Bintang East will also be underground and will be linked to shopping malls and hotels.

The second pre-qualification round for the elevated portion of SBK line which was launched in May this year provided more clarity on the eligibility of smaller and unlisted contractors. Recall that minimum paid-up capital was removed from the criteria and contractors were allowed to form joint ventures of not more than three companies.

Also, each contractor is only allowed to join up to two consortiums. Contractors are allowed to submit pre-qualification more than once provided it is within the same category, that is open or bumiputera. The latest updates from Gamuda Bhd indicate that 75 contractors have pre-qualified but details were not disclosed. The 75 names, most of which are listed companies, will be eligible to submit full tender documents, but only for the elevated portion. There are currently over 40 listed contractors on Bursa Malaysia.

Tenders for the RM12 billion to RM13 billion elevated portion will be called from Aug 11 onwards. Tender evaluation will take two to three months before contracts are awarded. The awarding of the various elevated packages will be spread over the next six to nine months, which suggests that MRT-related news flow should be active in 2H11. Being the project development partner (PDP), the Gamuda-MMC JV will be in charge of rolling out the packages, which will be divided into build; design and build; and nominated design and build.

It appears that there will be 19 packages for the elevated portion — 17 main civil works and two systems works packages. The total project value is RM12 billion to RM13 billion, suggesting an average value of RM632 million to RM684 million per package. However, given that the packages are likely to be awarded based on a mix of vertical scope (piling, earthworks, railworks, stations as one package) and horizontal scope (specialised works), some main packages are likely to be worth close to RM1 billion. Also, initial plans call for the rollout of four or five specialised station packages.

We think that this could include the Sg Buloh station, Curve, KL Sentral and Bukit Bintang West. Essentially, pricing will not be the only criterion for selection under the open tender process. This suggests that track record, credibility and experience will also be an advantage. Early indications are that contractors under our coverage, namely IJM Corp, WCT Bhd, Muhibbah Engineering (M) Bhd, Mudajaya Corp Bhd have pre-qualified to bid for the elevated portion.

The tunnelling portion is estimated to be worth RM7 billion to RM8 billion. There will be one single package comprising civil and station works. Pre-qualification rounds opened on May 27 and closed exactly a month later. Details of the pre-qualifiers should be available soon. The 9.5km tunnelling portion for the SBK line is likely to be awarded in early 2012. It will be on an open tender basis with participation by international contractors.

We think that selected Korean, Chinese and Singapore contractors are likely to be on the list. Nevertheless, we remain optimistic that the Gamuda-MMC JV has an advantage given its expertise, track record and the fact that it proposed the MRT project to the government. Under the Swiss Challenge method, the JV has the right to match the lowest bid.

Funding of the SBK line will be undertaken by the Ministry of Finance (MoF) and will be off contractors' balance sheet. MoF is likely to form a special purpose vehicle to undertake the issuance of bonds, which will be done gradually to meet the working capital requirements. For the remaining circle and radial lines, although there could be more details on them during today's event, we think they are likely to be a 2012 story as the focus over the next couple of months will be on executing the SBK line.

Today's ground-breaking and launching ceremony for the MRT SBK line will be a milestone for the Greater KL initiative under the NKEA and is evidence of progress of mega jobs. The July 2011 timeline has been met, which should assure investors that execution is on track and other targeted milestones such as tender evaluations and awards should be reached in 2H11.

The total estimated value of RM20 billion for the SBK line, coupled with the 19 elevated works packages and one large package for tunnelling, should underpin news flow for the sector. We expect contract awards for the MRT and other projects to be catalysts for the sector and many of the contractors that we cover. We maintain our "overweight" on the sector. IJM Corp and WCT remain our top picks. — CIMB Research, July 7

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