It has been reported that the Cabinet has given the go-ahead for the MRT line 3 which was suspended by the Pakatan Harapan government in 2018. Subsequently, MRT Corp which is the owner and developer of the project will need to present studies which include the structure, costs and alignment of this project within three months. The project is anticipated to be kick-started in the 2H of the year. This development is positive as the implementation of major infrastructure projects like these will boost the economy over the long-run, though also providing a near-term shot-in-the-arm to the sector. The MRT 3 project has been included in the 2021 Budget announcement, also being part of the 12th Malaysia Plan. MMC-Gamuda is a likely prime beneficiary of this project given its expertise and track record in the previous lines. We maintain our Neutral call on the sector nonetheless with these developments already priced-in.

• MRT 3 to go ahead. The project which is also known as the MRT Circle Line, was suspended when the Pakatan Harapan coalition assumed the seat of government in 2018. The 40km-long project was previously budgeted at RM45bn with initial completion targeted for 2025. The project was meant to provide coverage in areas surrounding Bandar Malaysia, Ampang, KL Ecocity, Bukit Kiara and Sentul. Of the 26 planned stations, 19 are underground, with the cost of underground stations understandably much higher than those above ground. About 60% of the project involves tunneling works. Nevertheless, with the cost reduced to about half of the initial plan, i.e. RM20bn – RM23bn in the alternative proposal submitted by MMC Gamuda in May 2019, it is understood that most of the underground portion has been replaced with elevated stretches. It is now expected that 70% - 75% of the alignment will be elevated.

• Positive, but not a surprise. The MRT 3 project has been given the go-ahead in the Budget 2021 announcement. We believe the government sees this as priority in order to complete the rail network within the Klang Valley as the completion of MRT 2 is fast-approaching. The project is also expected to have an immediate impact on the economy as it is a shovel-ready project, assuming the Government proceeds with the project with MMC-Gamuda as turnkey contractors, similar to MRT 2. As this project is expected to kick-off in 2H this year, we believe the Government will proceed with either a project delivery partner (PDP) or turnkey contract model. Reverting to the PDP model is unlikely, in our view, given constraints on the Government’s funding as PDP fees will result in additional costs. Though it is reported that the PDP model is being explored to minimize execution risks, we think this could potentially be offset by the experience of contractors with good track records previously involved in the MRT Line 1 and 2 projects.

• MMC-Gamuda as a prime beneficiary. This project will put MMC-Gamuda in the limelight as the main proxy for MRT project i.e. as PDP for MRT 1 and turnkey contractor for MRT 2. It is also a strong contender for the underground portion given its expertise. Other contractors may include experienced contractors previously involved in MRT 1 and 2, namely, IJM Corporation, Sunway Construction, TRC Synergy, Gadang and Muhibbah Engineering, being the beneficiaries of the above-ground portion.

Source: PublicInvest Research - 5 Apr 2021