News

• 4 contracts awarded. Yesterday, MRT Corp announced that it has awarded 4 contracts involving the Sg-Buloh- Serdang-Putrajaya line (MRT2). They are (i) EPCC for electric trains and depot equipment (RM1.62bn) awarded to HAP Consortium, (ii) EPCC for signalling and t rain control system (RM458m) awarded to the Bombardier -Global Rail consortium, (iii ) 4.6km viaduct package from Jinjang to Jln Ipoh (RM1.47bn) awarded to IJM and (iv) 2.6km viaduct package from Persiaran APEC, Cyberjaya to Putrajaya Sentral (RM648m) awarded to MRCB.

Comments

• The ball gets rolling. These 4 packages are the 2nd major rollout of the MRT2 contracts. Earlier in March, the underground works (RM15.bn) was secured by the MMCGamuda JV and 2 viaduct packages were awarded to SunCon (RM1.2bn) and AZRB (RM1.4bn). Thus far, the MRT2 contract awards are within the stipulated timeline set by MRT Corp (see Figure #1).

• More to come. From MRT Corp’s website, there are another 6 viaduct packages to be awarded from 2Q-3Q. We estimate each package to be worth at least RM1bn. Once the viaduct packages have been awarded, there will be 4 station packages that will be rolled out between 3Q-4Q. Stock Impact

• IJM: This RM1.47bn MRT2 contract is IJM’s first job win for FY17 (Mar) and has already surpassed our conservative target of RM500m. Accordingly, we raise our FY17 job wins assumption to RM2bn. With this MRT2 job, we estimate IJM’s orderbook to have scaled anot her new hi gh at RM8.5bn, implying a superior cover of 5.5x on projected FY16 construction revenue. After rolling our valuation horizon from FY16 to FY17, we maintain our BUY rat ing on IJM with a higher TP of RM4.04 (from RM3.80).
• MRCB: With the RM648m MRT2 contract award, MRCB’s job wins currently stand at RM705m YTD which is still within our full year target of RM800m. We estimate its orderbook to now stand RM2.4bn, implying a healthy 3.1x cover ratio on FY15 construction revenue. Whilst the MRT2 job is positive for MRCB, we retain our HOLD rating and RM1.32 TP given its lack of consistency in core earnings delivery.

Risks

• Most contractors involved in the viaduct packages of MRT1 suffered from lower than expected margins, and in some cases, losses incurred on the job. We reckon that margins will be better this time around for the MRT2 as contract values have been 30-35% higher on a per km basis. Furthermore, returning contractors for the MRT2 are also in a better position to price in for contingencies into their bids. Top Picks Maintain OVERWEIGHT
• Stay OVERWEIGHT on construction as 2016 will undoubtedly be a record year for contracts. The swift roll out of the MRT2 contracts thus far should remove any concerns on award delays.

Source: Hong Leong Investment Bank Research - 13 May 2016