Gamuda’s share price corrected 5% yesterday. We believe this is due to MRT Corps’ notice of tender that requires tenderers to be the turnkey contractor for the MRT Line 3 (MRT3) project to provide a financing. At an estimated cost of RM40bn, this will pose a challenge. In our view, there is still scope for Gamuda to participate in the underground portion of the project, working with the winning consortium. We believe Gamuda remains competitive for the MRT3 project as an incumbent but profit margin could be lower. Maintain BUY with RNAV-based TP of RM5.86.

Surprise MRT3 Tender Notice

MRT Corp issued a notice of tender on 6 Nov 2017 for the MRT3. The surprise was tenderers are required to provide 30-year financing for the project in addition to having a good track record in undertaking past MRT projects. A briefing is scheduled at 9.30 am on 15 Nov 2017 and tender closes on 29 Dec 2017.

Foreign Contractors Likely

We believe the Malaysian government is looking to undertake the MRT3 project on a public-private partnership basis and seeking financing from foreign sources. Based on estimated construction cost of RM40bn for MRT3 (RM36.6bn for underground works and RM3.4bn for above-ground works), the cost is likely to be prohibitive for local contractors to participate and provide private-sector financing. We believe it is likely to be a close race between the Japanese and Chinese governments to provide funding for the project, which will likely see Japanese and Chinese contractors appointed as main contractors, train and signaling equipment suppliers.

Reduced Scope Potentially

We gather that Gamuda is only looking to participate as a contractor and not to be part of the consortium that will have to provide financing for the project. Gamuda is interested to be a subcontractor for the underground works (32 km) and is unlikely to have a role as a PDP for the above-ground works (8 km), given that this will likely be handled by the main contractor.

Dampened Sentiment

Concerns on the Gamuda’s chances in winning the MRT3 underground works could dampen share price performance. We have a BUY call on the stock with RNAV-based target price of RM5.86, assuming Gamuda will secure the MRT3 project. Key risks: losing bids for new contracts, project delays, protracted negotiations for the sale of SPLASH.

Source: Affin Hwang Research - 8 Nov 2017