As expected, MMC and GAMUDA announced in Bursa yesterday that they have been appointed as Project Delivery Partner (PDP) by MRT Corp for the KVMRT2 from Sungai Buloh - Serdang - Putrajaya. Recall, the project was mentioned in the recent Budget 2015 in which the government is allocating RM23b for the railway project. We estimate that both MMC and Gamuda could be each gaining average PBT of about RM162m per annum for 5 years starting FY16 onwards. All in, we are POSITIVE on this news as are now seeing the project progressing well (PDP appointed, preliminary works). While MMC and Gamuda are the prime beneficiaries of the project, we believe this project will also benefit the existing KVMRT1 contractors such as Sunway, IJM Corp, AZRB, Gadang, TRC Synergy, Kimlun, Mudajaya, MTD, Naim, Muhibbah, TSR Capital and Kimlun. Maintain OVERWEIGHT with Gamuda (OP; TP: RM5.52) and Muhibbah (OP; TP: RM3.55) as our Top Picks.

MMC and Gamuda appointed as KVMRT2 PDP. As expected, MMC and GAMUDA announced in Bursa announcement yesterday that they have been appointed as Project Delivery Partner (PDP) by MRT Corp for the KVMRT2 project (from Sungai Buloh - Serdang –Putrajaya). However, the terms and conditions of appointment will be contained in an agreement that will be negotiated and agreed. Recall, the project was mentioned in the recent Budget 2015 in which the government is allocating RM23b for the railway project.

PDP may pocket RM162m PBT from the project. Assuming: (i) PDP’s scope of works amounting to RM15b, (ii) PDP get 6% fees (based on current fees for KVMRT1), we estimate that MMC and GAMUDA may each pocket total income (PBT level) of RM450m, to be paid progressively over five years of the project's lifespan. That is about RM90m yearly. This amount excludes the tunnelling package, which we expect the JV to win given their familiarity with the project, ready machineries (TBMs) and excellent track record in KVMRT1. If we were to include both PDP income and tunnelling package, MMC and Gamuda each could be gaining average PBT of about RM162m per annum for five years. Based on our sensitivity analysis, for every additional RM50m net profit in Gamuda and MMC, our TPs for both stocks will increase to RM5.89 (from current RM5.52) and RM3.02 (from current RM2.81), respectively. Nevertheless, we have yet to impute in any earnings and valuation impact from KVMRT2 project until the details of the project and PDP structure are finalized.

What’s next? After the PDP appointment, we believe MRT Corp will start promoting the project to the public soon (3-6 months). After the existing KVMRT1 reachs certain stage of completion (civil works completed), we believe the project’s tender will be out. This is expected to happen in 2HFY15. Hence, the KVMRT2 could only start construction by early-mid 2016.

Maintain OVERWEIGHT. All in, we are POSITIVE on this news as are now seeing the project progressing well (PDP appointed, preliminary works started). While MMC and Gamuda are the prime beneficiaries of the project, we also reaffirm our view that this project will also benefit the existing KVMRT1 contractors such as Sunway, IJM Corp, AZRB, Gadang, TRC Synergy, Mudajaya, MTD, Naim, Muhibbah, TSR Capital and Kimlun thanks to their strong track record and familiarity with KVMRT1 project. We also believe that KVMRT2 news flows came in at the right time for the impending listing of the Sunway Construction (SunCON) in 2H15. We reaffirmed our view that the KVMRT2 story is yet to be fully reflected in the construction stocks. Currently, construction stocks are trading at their 5-year average Fwd-PER of 13.6x. We believe the sector should trade at 15-17x Fwd-PER mirroring 2009-2010 levels i.e. given better clarity on jobs and earnings prospect for the contractors in the medium-long term. Reiterate OVERWEIGHT with Gamuda (OP; TP: RM5.52) and Muhibbah (OP; TP: RM3.55) as our top picks.

Source: Kenanga