Last week, MOF announced that the cabinet accepted MMC- GAMUDA JV’s offer to reduce the cost of MRT2 tunnelling works by RM3.6b to RM13.1b. Positive on the news and raise our FY19-20E CNP by 46-62%, respectively. Upgrade to OP, but on a lower TP of RM1.30 (from RM1.45) after lowering valuations on MALAKOF and Zelan as well as removing Senai Airport land valuation despite strong earnings adjustments.

MRT2 underground job back on. The Ministry of Finance (MOF) announced on 26th October 2018 that the cabinet took the offer from MMC-GAMUDA JV on the RM3.6b cost reduction for MRT2 tunnelling works, bringing the cost down from RM16.7b to RM13.1b. The value for the remaining works would be reduced from RM9.6b to RM6.0b. Recall that this is post the MoF announcing on 7th October 2018 that it will be terminating MMC-Gamuda JV as the main contractor for the tunnelling works of MRT2 worth RM16.7b as the government was looking at cost savings ranging from RM4.2-5.8b for the remaining tunnelling works.

Positive on this news. We are positively surprised as we did not expect the re-appointment of the joint venture in light of the sudden termination recently. As such we laud both government and MMC- GAMUDA for their efficiency in concluding the renegotiation in this limited timeframe. The renegotiated terms include the cancellation of two underground stations, Bandar Malaysia (North) and Bandar Malaysia (South), and we opine that the cancellation of these stations to be reasonable at this point due to the lack of development activities in Bandar Malaysia.

Back in business. We are positive on this news impact to earnings as the MMC-GAMUDA JV will procced with works in full swing albeit at a lower contract sum (of RM6.0b for the remaining works without compromising the original timeline), while MRT2 is scheduled to be fully operational by 2022. To recap, during the contract termination, we initially downgraded FY19-20E CNP by 43-63% post removing the tunnelling works from our estimates, and downgraded our call to MP (from OP) and TP to RM1.45 (from RM1.95).

All in, we raise FY18-19E CNP by 46-62% to RM88-76m post accounting for the renegotiated tunneling works into our forecast.

Upgrade to OUTPERFORM (from MP), albeit on a lower TP of RM1.30 (from RM1.45). Post accounting for the resumption of MRT works, we also lowered our SoP discount rate of 25% (from 35%), closer to our in-house levels of 15-20% on the positive impact of this news which means stronger earnings visibility. However, our TP is essentially lowered after also accounting for; (i) lower market value from MALAKOF post recently lowering our in-house TP to RM1.05 (from RM1.20), (ii) removing Senai Airport land (valued on land basis at RM20psf over 2080ac) from our SoP valuations due to the lack of land sales in recent years, and (iii) lower valuations for Zelan in line with its current market cap. We believe our OUTPERFORM call is justified at current levels as it is still supported by the Groups port business which make up the largest portion of its valuations, as well as listed associates MALAKOF and GASMSIA. Upside to our valuations could come from potential sale of the Senai Airport land, where it may prompt us to include it back into our SOP. Risks to our call include: (i) lower- than-expected ports activities, (ii) slower-than-expected construction progress, and (iii) de-rating of associates MALAKOF and GASMSIA.

Source: Kenanga Research - 29 Oct 2018