Maintain NEUTRAL and TP of MYR1.66, 76% total return including 8% dividend yield. The Minister of Finance announced that the Cabinet has approved the continuation of the LRT3 project at a final all-in “fixed price contract” of MYR16.63bn, from MYR31.65bn. While this has removed uncertainty surrounding the project’s implementation for Gkent, we reckon there are still details to be ironed out as the project is now moving away from the PDP model (50% JV with MRCB) to a new arrangement, where details are still being negotiated. Based on headline figures from the statement, the bias for our current forecasts is tilted towards a downside revision. However, pending the finalisation of details, we are maintaining our rating and TP for the stock.

LRT3 project is on but with material changes. The project’s go-ahead from the Government came after the project’s cost was slashed by 47% to MYR16.63bn, an all-in cost including but not limited to work package contracts, land acquisition, project management, consultancy fees, operational and overhead costs, as well as interest cost during construction. The cost savings would be achieved via a combination of a reduction in the number of car-trains, smaller depot size, streamlining of the size and design of LRT stations, shelving of the construction of five stations that has low ridership, cancellation of a 2km tunnel, and extending the construction timeline to 2024 from 2020 – thus skipping the “acceleration costs”.

Migrating from PDP model to a new contract. It was also announced that the LRT3 project will be restructured from a PDP model to a “fixed-price contract” with the MRCB-Gkent JV. We understand that negotiations for this contract are still ongoing and can potentially be wrapped up in the near future.

Maintain forecasts with a downside bias. Pending finalisation of the new contract and details thereof, we are keeping our earnings forecasts. However, based on headline figures stated in the announcement, chances are high that any potential revision to our earnings forecasts would be tilted towards the downside.

Maintain NEUTRAL with unchanged TP of MYR1.66. Pending the finalisation of the new contract for the LRT3 project, we are keeping our TP of MYR1.66. This is derived by:

i. Ascribing a 10x P/E for its metering segment’s FY19F PATAMI of MYR23m;

ii. NPV at a discount rate of 13% for its engineering segment;

iii. Adding the latest net cash balance of MYR362m.

Source: RHB Securities Research - 12 Jul 2018