Investment Highlights

• We maintain our NEUTRAL stance on the construction sector as we remain cautious on the outlook for the sector on the heels of the government’s cutbacks on public infrastructure spending on grounds of fiscal prudence.

• The Government has decided to go on with the 37km LRT3 project connecting Petaling Jaya (Bandar Utama) to Klang (Johan Setia), which is currently at about 10% completion. However, the scope of the project will be significantly reduced, to bring the cost (including land acquisition and interest during construction) down by 47% from RM31.7bil to RM16.6bil. Among the key changes to the scope are: 1. The temporary shelving of five stations with low projected ridership (Exhibit 1); 2. The downsizing of the design for the remaining 21 stations; 3. The downsizing of the design for the LRT train depot in Johan Setia, as the fleet is reduced from 42 sets of 6-car trains to 22 sets of 3-car trains; 4. The conversion of the only underground section, i.e. a 2km stretch at Persiaran Hishamuddin in Shah Alam, to an above-ground one (Typically, an underground design costs 3x more to build vs. an above-ground one); and 5. The extension of completion timeline by four years from 2020 to 2024 (The original plan incurred additional costs pursuant to a mandate to accelerate the completion of the project).

• Listed contractors WCT and Gabungan AQRS will be negatively affected by the shelving of one station each under their work packages of GS02 and GS04 respecitvely, while Sunway Construction, the main contractor for work packages GS07 & GS08, is spared the loss of any station. Meanwhile, the downsizing of the design for the remaining stations will hit all main contractors involved in the project.

• WCT and TRC, the main contractors for the Johan Setia LRT train depot Phases 1 & 2 respectively, will be hurt by the downsizing of the design for the depot. On the other hand, IJM is likely to see the contract value for the underground section being revised down from RM1.1bil currently, in line with the change in design from an underground to an aboveground one.

• We are keeping our forecasts for the companies which are affected by the latest development, pending the announcement of the details on the changes in the job scope. We do acknowledge that, as compared with an outright cancellation of the LRT3 project, the latest development no doubt is still a small consolation to the contractors involved in the project.

• Our top picks for the sector are Gamuda (HOLD) (the long delayed Penang Transport Master Plan project may finally get off the ground) and Sunway Construction (HOLD) (ability to compete on an open tender basis and recurring building jobs from parent Sunway Bhd) and Kimlun (BUY) (sustained earnings despite the cutbacks on local public jobs as it depends largely on private sector building jobs, coupled with recurring orders for its precast concrete products from Singapore).

Source: AmInvest Research - 12 Jul 2018