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Malaysia: CIMB Research cautious on construction after RM100b rail jobs cancelled
KUALA LUMPUR: CIMB Equities Research remains cautious about the construction sector after over RM100bil worth of upcoming rail projects have been cancelled over the past three days.
The projects which have been axed are the High Speed Rail (HSR) and the MRT 3, it said on Thursday.
With HSR and MRT 3 off the table, it raised the red flag on the RM55bil to RM60bil East Coast Rail Link (ECRL) and the RM9.4bil Gemas-JB double-tracking rail project.
Both contracts were awarded to Chinese contractors (CCCC for ECRL and a consortium of three China rail players for Gemas-JB rail double tracking).
ECRL is currently being renegotiated given that the EPCC scope has been awarded and is ongoing. For the Gemas-JB project, before GE14, YTL-SIPP JV was awaiting the official award.
“We believe any upcoming big-ticket rail projects are now at risk of deferment, renegotiation or outright cancellation,” it said, pointing out to the ECRL and the Gemas-JB projects.
CIMB Research said the only upcoming rail project that the government has committed to now is the Johor Bahru-Singapore Rapid Transit System (RTS), a 4km line to connect the neighbouring countries, to be jointly owned by Prasarana Malaysia Bhd and Singapore’s SMRT Corp Ltd.
The research house said MRT 3 would have provided earnings visibility for contractors and building material providers between 2019F and 2026F.
While the hardest hit would be Gamuda, MMC, and George Kent, any contractor with rail exposure would be impacted by the negative sentiment.
“We see the news impacting the rail job outlook of WCT Holdings, MRCB, Sunway Construction Group (SunCon) and Gabungan AQRS.
“Lafarge, too, would be impacted as the projects’ cancellations dashed any hope of a surge in infra jobs to absorb the overproduction of cement.
“Kimlun Corp, a producer of tunnel-lining segments and segmental box girders, will similarly not be spared,” it said.
It maintained its underweight and reduce calls for mostly all rail players. An upside risk to the sector call is a selective revival of contracts.
CIMB Research has a reduce on Gamuda and target price of RM4.50 while its closing price was RM3.18.
The cancellation of MRT 3 is a big blow to Gamuda’s order book outlook. Chances of securing rail jobs have now been wiped out for the next two years.
A revival is unlikely for now, though some opportunities may emerge in Penang’s transport projects.
As for MRCB, it also has a reduce call and target price of 54 sen while its closing price was 57 sen.
“We regard MRCB as one of the country’s major rail players and PDP companies. Its rail outlook is now impacted by the cancellation of the two rail contracts. Order book upside could be subdued in the medium term,” it said.
The research house also has a reduce call on YTL Corporation with a target price of 92 sen while its closing price was 93 sen.
“YTL Corp is not targeting MRT 3 but the fallout of HSR may negatively impact the outcome of the Gemas-JB rail double tracking project. The prospect of boosting its order book with Johor rail contracts could diminish completely,” it said.
Source: https://www.thestar.com.my/business/business-news/2018/05/31/cimb-research-cautious-on-construction-after-rm100b-rail-jobs-cancelled/#hm5pMiXK0fkYjkY2.99