StarBiz reported that Prasarana is considering taking over the LRT3 from its PDP (MRCB-GKent JV) as cost has ballooned from RM9bn to over RM15bn. With progress at 10%, we feel an outright scrapping is unlikely but scaling down is a plausible scenario. While PDP termination is a risk, this would be counterintuitive given its role to ensure delivery within cost and time along with penalties imposed for failure. Removing the PDP would impact GKent’s earnings by 26-67% and MRCB by 8-37%. While our earnings forecast for both are unchanged, we remove the LRT3 from their respective SOP valuations, reducing GKent’s TP from RM1.52 to RM1.17 and MRCB from RM0.68 to RM0.63.

NEWSBREAK

StarBiz reported that Prasarana is considering taking over construction of the LRT3 from its PDP to curb its spiralling cost. According to the news article, the government is reviewing the project as cost has ballooned from the initial estimate of RM9bn in 2015 to more than RM15b. Besides, there is also a possibility that the project might be shelved given the current financial constraints according to the article.

HLIB’s VIEW

PDP role awarded back in 2015. To recap, MRCB-GKent JV was appointed as PDP back in 2015. Cost of the project is initially estimated at RM9bn and the first phase is expected to be complete by Aug 2020 and the remaining balance 6 months later. Arguably, the incremental cost from the initial RM9bn estimate can be attributed to (i) delays in starting construction immediately once the PDP was appointed as several project changes were requested by Prasarana, (ii) higher building material price (i.e. steel) when the work packages were actually awarded and (iii) additional work scope required (e.g. iconic bridge in Klang).

Business as usual. We understand that the project is still ongoing at this juncture and any discussions regarding cost review or termination of PDP role are in preliminary stage, if any at all. As at July 2018, all infrastructure and system packages were awarded and project progress is estimated at about 10%.

Possible outcome. Given that all work packages have been awarded and work is ongoing, we opine that the project is unlikely to be scrapped as the potential compensation to the work contractors may be significant. While termination of the PDP is a possible risk, this is counterintuitive as the PDP’s role is to ensure the project is delivered within cost and on time, with penalties imposed should it fail to do so. As such, we opine that project downsizing is a more plausible option as the project cost has yet to be finalized.

Earnings impact. Assuming that the PDP role is terminated or the project is scrapped now, GKent’s FY19-21 earnings would be cut by 26%, 53% and 67% respectively. For MRCB, the potential FY18-20 earnings cut would be 8%, 30% and 37% respectively. Nonetheless, we maintain our earnings forecast for now pending a more concrete decision on this matter. To note, we have assumed that the LRT3 value would amount to RM12bn (above RM9bn but below the RM15bn reported by StarBiz).

Bear case scenario. In view of the growing uncertainty regarding LRT3 project, we decided to remove the unbooked NPV value of LRT3 for both GKent and MRCB in their SOP valuation in order to reflect bear case scenario for both companies. Under this bear case scenario, our SOP based TP of GKent is reduced from RM1.52 to RM1.17 while TP of MRCB is reduced from RM0.68 to RM0.63. Maintain HOLD call for both stocks.

Source: Hong Leong Investment Bank Research - 10 Jul 2018