Construction
Maintain overweight: We expect the Klang Valley (KV) MRT project to feature in the next batch of entry point projects (EPP) to be announced by Prime Minister Datuk Seri Najib Razak, potentially at the end of this month or early 2011. The subsequent awards of the remaining KV LRT job parcels, and a revival of a third LRT line are some of the positive news flow into 2011. This should sustain interest in construction and building material stocks. We continue our "overweight" call on the construction sector.

Earlier this week, the prime minister announced nine new developments and several EPPs, adding to the earlier nine publicised on Oct 25, during the launch of the Economic Transformation Programme (ETP). We now have 16 EPPs confirmed out of the total 131, that is 12%, with investment value of at least RM51 billion, accounting for 7% of the total EPPs' RM696 billion investment value. We expect regular monthly updates on the EPPs from now on. By end-2010 or early 2011, we expect the KV MRT project to be firmed up and the details unveiled.

The Edge Financial Daily yesterday reported on the appointment of a project delivery partner (PDP) for the KV MRT project as among the points to be discussed by the Cabinet this month. The PDP will be more than a project manager. We understand that it will: (i) implement the project on behalf of the government; (ii) take on the delivery risks (cost and timing), hence, ring-fencing the risks by the government; and (iii) conduct open bids for all parcels of work for cost efficiency. This is already international practice.

Gamuda-MMC is eyeing the chariot master's position, essentially the PDP role, for the MRT project. We understand that the PDP role for past projects in Malaysia has been undertaken by both consultants and contractors separately. Contractors as PDP has its merits: (i) material procurement at better cost; and (ii) interfacing of skills to handle the sub-contractors, all supported by a bigger balance sheet. Some of the projects undertaken by contractors as PDP are the ERL and Sentul rail line by YTL, and the electrified double-track rail project northern section under Gamuda-MMC.

Syarikat Prasarana Negara awarded two contracts this week for the KV LRT line extension: (i) Package A for the Kelana Jaya line (RM950 million; Kelana Jaya-Summit) to TRC Synergy; and (ii) Package A for the Ampang line (RM635 million) and the supply of segmental box girders (RM68 million) to Bina Puri. The awards for the other parcels are expected to run into 2011. Meanwhile, a third LRT line (Kota Damansara-city centre) is in the works, which could be the revival of the Kota Damansara-Cheras line pursued earlier by MRCB. This was put on the back burner as some stretches will run parallel to the MRT line. UEM and IJM may have teamed up for a slice of the jobs. - Maybank IB Research, Dec 2

This article appeared in The Edge Financial Daily, December 3, 2010.