News 

• PDP  for  Line  2.  The  MMC-Gamuda  JV  announced  that  it has  been  appointed  by  MRT  Corp  as  the  Project  Delivery Partner  (PDP)  for  the  MRT  Line  2  or  Sg  Buloh-SerdangPutrajaya  (SSP)  line.  The  PDP  agreement  between  both parties  has yet to be finalised.

Comments  

Project details.  Based on its  original proposal,  SSP line will span  56km,  of which 45km will be elevated (27 stations) and 11km underground  (8 stations) at a cost of RM23-25bn.

Milestones  ahead.  The  appointment  of  the  JV  as  PDP marks  is  a  significant  milestone  in  that  it  officially  endorses that  the  SSP  line  will  proceed.  We expect news flow on the SSP  line  to  gain  traction in the coming months with the key ones being:  (i) official signing on the PDP agreement by year end  or  early  2015;  (ii)  prequalification  in  mid-2015;  (iii) tendering  in 4Q15;  and (iv)  initial contract awards  in 1Q16.

Unchanged  fee?  Previously,  there  was  talk  that  the  PDP fees  for  the  SSP line may be lowered to 4 -5%.  We gathered that  the  JV   is  pushing  for  the  fees  to  be  mainlined  at  6%, arguing  its  case  on  the  timely   execution  with  minimal hiccups of the ongoing  SBK line.

Tunnelling  frontrunner.  We  envisage  that  the  JV  will emerge  victorious  in  securing  the  tunnelling  works  (RM9bn) for  the  SSP  line.  The  JV  has  a  cost  advantage  in  bidding given its sunk cost (RM500m)  for the tunnel boring machines which can be reused.  Also, being a  pure  loc al contractor, the JV  will  be  accorded  a  pricing  advantage  in  its  bid  under the Swiss  Challenge.  Note  that  the  pricing  advantage  of  7.5% for the ongoing SBK line was never utilised s ince the JV was already  the  lowest  bidder.   Lastly,  its  deep  understanding  of the  geological  conditions  on  tunnelling  within  KL  also provides  it an edge over  its competitors.

Risks

• Execution  risk,  rising  material prices, project implementation delays, property  sector slowdown  and political risks.

Forecasts

• Unchanged.  Job  wins  from  the  SSP  line  has  been  partially reflected  in  our  forecast s  via  our  RM2.5bn  p.a.  orderboook replenishment  assumption for  FY15-16.

Rating

BUY

• Gamuda is our top pick in the construction space as it is the best  proxy to the MRT play. We expect interest in the stock to  pick  up  in  tandem  with  rising  news  flow for the SSP line. Resolution  of  the  Selangor  water  saga  will  be  an  added catalyst.

Valuation

• TP  maintained  at  RM5.74  based  on  SOP  which  implies FY15-16  P/E  of  16.5x  and  14.9x ,  respectively .  This  is inline with  its  3 year mean P/E (based on 1 year forward earnings) of 16x.

Source: Hong Leong Investment Bank Research - 30 Oct 2014