• Sector Top Picks: Sunway Construction and MGB. Pursuant to the Government’s approval of the MRT3 project on 4 Mar, more details have been disclosed at yesterday’s parliamentary session. Minister of Transport Datuk Seri Dr Wee Ka Siong confirmed that MRT3 will be implemented via the turnkey project method, similar to the revised version of the Sungai Buloh-Serdang-Putrajaya (SSP) line (ie MRT2). Tenders will be open in May, then awarded by 4Q22 in five packages over a period of 6-8 years. We make no change to our NEUTRAL stance on this sector.

• Estimated price and timeline for completion of MRT3. The estimate is MYR31bn, with final costs subject to open tender according to the CEO of MRT Corp Datuk Mohd Zarif Hashim. This latest estimate is about 31% lower than the initial sum of MYR45bn (when the project was first announced to the public in 2016). The first phase of MRT3 is expected to be opened in Dec 2028, while the entire project is slated for completion by 2030. The proposed length of MRT3 spans 51km, with 39km in Kuala Lumpur and the remaining 12km in Selangor. Under this alignment, 80% of the line will be elevated, and 20% underground.

• Potential beneficiaries. Potential beneficiaries include Gamuda (GAM MK, TRADING BUY, TP: MYR3.55) which has participated in MRT1 and MRT2 via the MMC-Gamuda JV, and Sunway Construction (SCGB MK, BUY, TP: MYR1.74) which was awarded MYR1.4bn worth of jobs for the MRT2 project. Other contractors that could stand a chance to participate in MRT3 include IJM (IJM MK, NEUTRAL, TP: MYR1.66) and Malaysian Resources (MRC MK, NEUTRAL, TP: MYR0.38)

• Despite the latest active news flow on MRT3, concerns remain on the possibility of further delays in the rollout of tender packages. Meanwhile, MRT3 would be financed via hybrid funding – which entails bonds including sukuk issuances, government guarantees and deferred payments. No mention was made on any private funding initiatives, but this should not be ruled out, given the country’s funding limitations. With that in mind, contractors are likely to bear some funding risks of the MRT3 project, should the private funding initiative be implemented.

• Top Picks. We continue to advocate strong names like Sunway Construction and MGB. Overall, we believe they have supportive catalysts to buffer near-term risks, supported by stable orderbook replenishment rates and robust balance sheets.

• Upside/downside risks to our sector call are shorter-than- expected/longer-than-expected delays in progress works, success/failure in securing new orders, and cheaper/higher raw material prices.

Source: RHB Research - 16 Mar 2022