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HLBank Research Highlights

Author: HLInvest   |   Latest post: Wed, 16 Oct 2019, 9:29 AM

 

Construction - Scaling Down LRT3

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The Cabinet has approved the continuation the LRT3 at a final cost of RM16.63b. Construction of the project will be restructured from a PDP model to a ‘fixed price contract’ and timeline is extended from 2020 to 2024. We maintain our construction project cost assumption at RM12bn. Apart from the PDP (MRCB-GKent) listed contractors that are exposed to the LRT3 are Suncon, WCT, IJM, AQRS, Mudajaya and TRC. Due to extension of construction timeline, we cut GKent FY19-21 earnings by 26-37%. For MRCB, we cut FY18-20 earnings by 8-10%. Maintain TP and recommendation for all affected counters pending for more clarification on the exact work scope impact.

NEWSBREAK

The Cabinet at its meeting on 11 July 2018 has approved the continuation of the LRT3 project at a final cost of RM16.63b. This cost will include all project costs, including but not limited to Work Package Contracts, land acquisition, project management, consultancy fees, operational and overhead costs, as well as interest during construction. In addition, the construction of the project will be restructured from a PDP model to a ‘fixed price contract’ model.

Key steps taken to reduce the cost of the project include: (i) reducing the order of 42 sets of 6-car trains to 22 sets of 3-car trains; (ii) reducing the construction size of the LRT train depot; (iii) streamlining the size and design of the LRT stations based on Kelana Jaya LRT line standards; (iv) shelving the construction of 5 stations which are Lien Hoe, Temasya, SIRIM, Bukit Raja and Bandar Botanic; (v) cancelling the 2km tunnel together with an underground station at Persiaran Hishamuddin, Shah Alam and (vi) extending the timeline to complete the LRT3 project from 2020 to 2024.

HLIB’s VIEW

Within expectations. News of downsizing LRT3 is not a surprise to us as we mentioned before that downsizing and hence, reducing cost is the most plausible option. Besides, less compensation is required in scaling down of the project compared to scrapping the project altogether.

Fixed price contract model. The project has been restructured from the PDP model to a ‘fixed price contract’. We understand that details of the new model are still under discussion and will be disclosed at a later stage. We maintain our construction project cost assumption at RM12bn pending for more details. However, MRCB-GKent JV will be negatively affected by the extension of construction timeline as their earnings from the project will be recognised over longer period.

Impact to listed work contractors. Apart from the PDP, listed contractors that are impacted by this news are Suncon (RM2.3b Package GS07-08), WCT (3 work packages amounted to RM1.67b), IJM (RM1.1b underground package), Gabungan AQRS (RM1.2b Package GS04), Mudajaya (RM1.2b Package GS01) and TRC (RM761m Package TD2).

Earnings and valuation. Due to extension of construction timeline from 2020 to 2024, we cut GKent FY19-21 earnings by 26.1%, 34.3% and 37.4% respectively. For MRCB, we cut FY18-20 earnings by 7.9%, 10.1% and 9.2% respectively. Nonetheless, we maintain our earnings forecast and TP for Suncon, WCT and IJM pending for more details on the work packages affected. We maintain our bear case scenario TP for both GKent and MRCB (which we have previously removed the PDP portion from their respective SOP valuation) given heightened uncertainty and pending for more clarification on the project.

Source: Hong Leong Investment Bank Research - 13 Jul 2018

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