News

• New structure for MRT3. The Edge reported that MRT Corp is opening a tender to select a turnkey contractor to build and finance the upcoming MRT3 (RM35-40bn). Citing the notice of tender, the successful bidder will be responsible for the engineering, procurement, construction testing and commissioning of the 40km MRT3 which features 32km of twin bored tunnels and 8km of elevated viaducts. Prospective bidders may form consortiums but must not have more than 8 members. On the financing part, this should include a minimum financing period of 30 years and the margin of financing must not be less than 90% of the expected project cost.

Comments

• No more PDP role? Judging from the news, it appears that the MRT3 will no longer employ the PDP model. Both the MRT1 (completed) and MRT2 (ongoing) applied the PDP concept with the MMC-Gamuda JV helming the role.

• Likely a race for foreigners. To recap, financing of the MRT1 and MRT2 was borne by the Government (via issuance of Danainfra bonds). With the winning consortium required to fund MRT3, this would help remove the Government’s funding burden. We understand that this new structure for the MRT3 is likely to attract interest from both Japanese and Chinese consortiums.

Stock Impact

• Gamuda still a key MRT3 play. Gamuda’s share price fell by 5.1% yesterday on expectation that the PDP model will no longer be employed for MRT3. Management reassured us that it will still bid for the underground works from the winning consortium. We believe that Gamuda’s tunnelling track record with SMART, MRT1 and MRT2 puts it in a prime position to secure such works for MRT3. Furthermore, Gamuda is the only local contractor that has the necessary experience to undertake such works. It also has much understanding of tunnelling within Klang Valley’s karstic limestone formations. Management maintains its RM10bn orderbook replenishment guidance over the next 2 years which includes jobs such as the MRT3 and ECRL.

• Lesser elevated scope. The MRT3 will have a shorter elevated portion compared to MRT1 and MRT2. This woul d imply fewer viaduct packages to be dished out. We believe that contractors that have undertaken viaduct works for both MRT1 and MRT2 should stand out. These include names such as IJM, SunCon, Ahmad Zaki, Gadang and Mudajaya.

Risks

• Lower than expected MRT3 jobs dished out to local contractors.

Rating

Maintain OVERWEIGHT

• We expect robust job flows for 2018, driven by the rollout of mega rail projects such as the ECRL, MRT3 and HSR. The significance of these rail jobs should not be underestimated. To illustrate, job wins hit a high of RM28bn in 2012 and RM56bn in 2016 when the MRT1 and MRT2 were rolled out.

• Maintain BUY on Gamuda with unchanged TP of RM6.36 . We view the recent share price retracement as a good opportunity to accumulate.

Source: Hong Leong Investment Bank Research - 8 Nov 2017