According to the media, the MMC-Gamuda JV has finalised the details with MRT Co on the scope of work and fees for its role as the Project Delivery Partner (PDP) for the MRT project. The fees are expected to be  a lucrative 6% of the total project cost excluding tunneling (c. RM8bn excluding land cost) and 5% reimbursement for costs incurred so far for approvals, technical designs and Environmental Impact Analysis (EIA). This will be progressively recognised over the duration of the project until mid-2017.

The total PDP fees works out to be RM480m assuming a project cost of RM8bn and 6% fees but will be RM900m if including the tunneling portion (c. RM7bn). This works out to be RM0.12/share for Gamuda  and RM0.08/share for MMC. This has yet to be factored into our SOP but we have taken some assumptions in terms of the civil works for the MRT. Recall, the MMC-Gamuda JV is also bidding for the tunneling portion.

Hence, in the unlikely event it is not awarded the project it is able to reap PDP fees for the entire project  cost (c. RM15bn). The scope of works for the PDP include acting as a turnkey contractor where it will be responsible for the engineering designs and technical specifications. It also has to deliver the MRT project within the cost and time frame and be responsible for all other contractors in terms of quality, safety and timeliness.

We continue to like MMC-Gamuda's chances for the tunneling works given i) tunneling experience dating back to 2001 with 4 projects currently; ii) government's interest to keep project domestic driven given  strong multiplier effect on the economy; iii) the project will be awarded via a Swiss Challenge; and iv) MRT is funded by the government and hence foreign contractors may not have an advantage in terms of the funding card.

The award is expected in April 2012. We maintain our Buy ratings on Gamuda (TP RM4.50) and MMC  Corp (TP RM3.70).

Source: HwangDBS Equity Research 9 Feb 2012