Construction stocks crumble on news of MRT2 undergound works retender

PETALING JAYA: Construction stocks were spooked today by news of the retendering of MRT2 underground contract, with Gamuda Bhd, part of MMC Gamuda Joint Venture appointed as project delivery partner (PDP) for the mega project, seeing the steepest drop of as much as 24.3%.
Gamuda's share price hit a multi-year low of RM2.32 on concerns over the erosion of earnings as a result of the construction cost cut. At market close, it skidded 78 sen or 24.3% to RM2.43 on active trading of 92.7 million shares. Six of its warrants fell between 18.4% and 71.4%.
The share price of the other half of the joint venture, MMC Corp, sank as much as 23 sen or 17% to RM1.12 before closing 22 sen or 16.3% lower at RM1.13 on 6.92 million shares done.
Short selling of Gamuda and MMC shares was suspended today due to heavy selling pressure.
Overall, the construction index tumbled 19.53 points or 10.1% to 174.59 points. IJM Corp Bhd and Sunway Construction Bhd lost 10.6% and 10.9% to RM1.60 and RM1.56, respectively.
Analysts downgraded Gamuda's earnings by up to 30% after the sizeable cut in MRT2's construction cost.
PublicInvest Research said as the underground portion of MRT2 constitutes RM5.5 billion or 92% of Gamuda's RM6 billion outstanding order book, it will adversely impact Gamuda's construction earnings in the near term, in the absence of new jobs.
It, however, is not discounting the possibility of Gamuda once again bidding for the underground contracts which could spell cost advantages to the group as it already has the boring machines and project knowledge.
PublicInvest Research cut Gamuda's FY19-21 earnings by 30%, 21% and 20% respectively with a revision in target price to RM3 from RM3.80 while maintaining a "neutral" call on the stock.
AmInvestment Bank Research slashed its net profit forecasts for FY19-21 by 16%, 15% and 14% respectively for Gamuda.

The stock has been downgraded to "underweight" with a lower fair value of RM2.71 from RM3.34.
The research house also raised the question of whether the termination is an isolated event or could it leave a dent on Gamuda's prospects of winning major government contracts in future.
AmInvestment Bank Research is also cautious on the outlook of the local construction sector as the government cuts back on public infrastructure projects on grounds of fiscal prudence.
Should Gamuda fail to secure the retendered portion of the underground portion, CIMB Research estimates an 18% to 20% downside to its FY19-21 earnings per share forecasts.
The research house added that the latest development could impact other MRT civil contractors such as IJM, Sunway Construction, WCT and MRCB.