In a recent interview with the Financial Times, Tun Dr Mahathir Mohamad was reported to have said “unnecessary” infrastructure projects would be halted, amongst few other measures, as part of radical cost-cutting measures to prevent the country from “being declared bankrupt”. For starters, the Prime Minister has now said he will cancel the multibillion-dollar megaproject to build a high-speed rail (HSR) network linking Kuala Lumpur and Singapore — a flagship project of the previous administration. The project which is estimated to cost c.RM110bn is not expected to “earn the country a single sen”, counters the new government.

This obviously comes across negatively for the Project Delivery Partners (PDP) whose contracts were just formalized on May 2, 2018. To recap, the MRCB-Gamuda (50:50) and YTL-THP (70:30) joint ventures were formally appointed as the PDPs whereby MRCB-Gamuda’s North Package Project would cover the alignment from the Bandar Malaysia terminus station to the first standard viaduct pier on the south side of the Melaka Station whilst YTL THP’s South Package would cover the remaining stretch to the Malaysia Singapore border.

Gamuda’s exposure to the rail project is now adversely affected, needless to say. In addition, its highway concessions are also under threat given the new government’s intent of abolishing toll collections and acquiring these highways via the appropriation clause. With market fears on the former confirmed and the increasing uncertainties surrounding the latter, we are compelled to lower our call from Outperform to Neutral in light of increasing de-rating catalysts. Our TP is also revised downwards to RM4.30 (RM6.20 previously), after accounting for lower PER multiple for its construction business and 10% discount to the overall SOP valuations, though it must be noted that its share price has already reacted very negatively post-polling day. We make no changes to earnings estimates as we had not accounted for the HSR project in our forecasts. Toll-related contributions will be adjusted accordingly upon clarity of takeovers.

• Current status of HSR. We understand that the government is now assessing on how it can minimise the financial penalty for breaking the bilateral agreement with the Singaporean government on the HSR which is believed to cost as high as RM500m. Overall construction costs are believed to be c.RM110bn which include the entire cost of construction, rolling stock, land acquisition, and interest costs. However, there is still no clarity on the compensation for the two project delivery partner (PDP) scopes awarded to the MRCB Gamuda and YTL-THP joint ventures.

Source: PublicInvest Research - 30 May 2018