Highlights

We attended MRT Corp’s briefing on the project progress of the KVMRT Sungai Buloh-Kajang Line. The briefing was chaired by Datuk Azhar, CEO, and Mr. Marcus Karakashian, Project Director. Below are the salient points:

Good progress… The project which began in end 2010 has achieved an overall completion rate of 28.6% and is still comfortably on track for completion by Jul-17. Insofar, some RM20bn+ contracts have been awarded with 18 packages remaining. The remaining package value is ~RM2bn and will not be much of a benefit for the public listed construction players. Line 1 of the KVMRT project is estimated to cost RM23bn (excluding land acquisition and rolling stocks).

Elevated status… The elevated works which mainly comprises of 8 viaducts and 2 depot stations have achieved 19.9% progress. Despite the initial hiccups from utility relocation works, progress has caught up to speed and is proceeding as planned. With 70% of piling works completed, we believe that works for the piers and guideway spans construction (currently at 16% completed) will accelerate.

However, given the heavy traffic flow (on certain stretches) and stringent safety standards, we believe that the viaduct contractors have underestimated these additional costing which has led to one of the additional factors impacting their margins.

Underground status… The underground works portion, which is currently undertaken by MMC-Gamuda is 41.5% completed. All 10 TBMs have reached the shores of Malaysia with 7 units on site of which 5 units are currently tunnelling. We were updated that >3km in length have been tunnelled out of the total 19km (9.5km x 2) tunnelling length.

Line 2 & 3… We believe that Line 2 and Line 3 will proceed ahead given the Government’s plan to alleviate traffic congestion within Klang Valley. Both Line 2 and Line 3 will most likely be sequenced accordingly to avoid straining our construction resources.

Risks

Execution risk; regulatory and political risk; rising raw material prices; and unexpected downturn in the construction and property sector.

Rating/ Valuation

NEUTRAL

The biggest winner from the rollout of future MRT lines will be MMC-Gamuda JV given their first mover advantage and experience in executing the current line. The other main contractors (see Figure #1) for this line will likewise also benefit, however margins will not be attractive given the intense competition.

Maintain NEUTRAL on the construction sector in view of the imminent delays of Government-related projects, slowdown in the property sector, coupled with greater scrutiny from the opposition party on mega projects.

Top Picks

Top picks in order of preference are:

IJM (BUY; TP: RM6.32);

Mudajaya (BUY; TP: RM3.53); and

Sunway (BUY; TP: RM3.35)

Source: Hong Leong Investment Bank Research - 8 Nov 2013