MyHSR Corp has appointed MRCB-Gamuda and YTL-TH Properties consortia as its project delivery partners (PDP) for the Kuala LumpurSingapore High Speed Rail (HSR) civil works in Malaysia. We highlighted MRCB-Gamuda as potential winners for the HSR project in a report on 5 January 2018 given its strong track record. But sharing the PDP works with YTL-TH comes as a surprise. We remain Overweight the construction sector. We upgrade MRCB to a BUY with a raised TP of RM1.28, based on 20% discount to lifted RNAV and highlight the stock as our top mid-cap BUY replacing WCT. Gamuda and HSS remains our top large-cap and small-cap BUYs.

MRCB-Gamuda win is positive

We gather that it was a close contest between MRCB-Gamuda and IJMSuncon-Jalinan Rejang-Maltimur Resources consortia for the northern portion (KL to border between Melaka and Johor) of the HSR PDP contract. In terms of PDP experience and track record, MRCB-Gamuda was a stronger contender as highlighted in our Construction Sector Update HSR race begins dated 8 January 2018. The YTL-TH consortium win came as a surprise but we understand that YTL has the track record in undertaking the Express Rail Link (ERL) earlier and proposed the HSR project previously in 2006. YTL-TH will undertake the southern portion of the HSR in Johor.

Details Are Yet to be Worked Out

We understand that MyHSR has issued Letter of Intents (LOI) to both the MRCB-Gamuda and YTL-TH consortia and the terms of agreement shall be mutually agreed upon by both parties within 3 weeks from the date of the LOI, ie, 5 April 2018. The PDP fee and project value has not been determined. We gather that the Malaysian portion of the infrastructure works could be worth about RM30-35bn. We estimate the construction cost for the northern section is about RM15-21bn (50-60% of total project value) and will be shared 50:50 by Gamuda-MRCB. Each party will get about RM7.5-10.5bn. If based on the PDP fee for previous infrastructure projects at 6% of project value, each party will earn RM0.34-0.48bn in net profit over the 8-year construction period of 2019-2026. The project will also increase Gamuda and MRCB's estimated current order book of RM13.5bn and RM9.4bn respectively (including PDP contracts), improving long-term earnings visibility.

Positive Earnings Impact

We have assumed Gamuda will win RM10.1bn new contracts in our earnings forecasts and hence the contract win is within our expectation. But there is potential earnings upside if it also wins the KVMRT Line 3 project through the Gamuda-George Kent-MMC consortium. We have not factored in any new contracts for MRCB in our earnings forecasts previously.

Upgrade MRCB to BUY

We lift our EPS forecasts for MRCB by 4-5% for FY19-20E and RNAV to RM1.60 from RM1.50 previously (assuming higher construction sustainable earnings of RM85m compared to RM61m previously. We upgrade MRCB to a BUY from Hold with TP raised to RM1.28 from RM1.20, based on the same 20% discount to RNAV.

Source: Affin Hwang Research - 6 Apr 2018