Local contractors to benefit from ‘upbeat’ railway industry, say analysts

17 Feb 2019 / 11:07 H.

KUALA LUMPUR: Despite “some changes” being seen in the local railway industry involving the East Coast Rail Line (ECRL) and the Kuala Lumpur–Singapore High-Speed Rail (HSR) projects, analysts remain upbeat as the continuance of other projects is set to benefit local contractors.

To name a few, the Light Rail Transit (LRT) 3 and Mass Rapid Transit 2 (MRT) 2 with a combined value of RM40 billion would likely sustain industry earnings, in the immediate to medium-term, said MIDF Research analyst Danial Razak.

“While the cost revisions were significant, we believe the move is rational. Should the costs be maintained in defiance of economic discipline, we do not rule out the possibility of the government shouldering a bigger fiscal risk, moving forward.

Nonetheless, getting the green light to continue with such large scale projects is actually a big relief for the industry as a whole.

Danial remained bullish on the outlook for the local rail industry as these projects would continue to benefit Sunway Construction, WCT Holdings, Malaysian Resources Corporation Bhd (MRCB), Gamuda Bhd, Muhibbah Engineering (M) Bhd and Gabungan AQRS Bhd - the big time local contractors involved in rail industry.

He said WCT, for example, had secured three LRT3 contracts with a combined value of RM1.7 billion for jobs involving depot, stations and viaduct works.

At its recent extraordinary general meeting, MRCB announced that construction of the LRT3 projects were expected to resume in the second half of 2019. Only 10% of the project works have been completed, thus far.

To recap, the project was stalled for almost a year, pending review in light of the revelation by the Finance Ministry that the total cost (of the line) had ballooned to RM31.65 billion.

The ministry then approved the 36km-long track project for RM16.3 billion, down a whopping 47%, from its original cost.

“While some train depots will be downsized, we think the impact on WCT’s package will be minimal. This is considering the fact that phase one of the Johan Setia depot is nearing completion.

“Muhibbah Engineering has also clinched few noise barrier packages for LRT3 and MRT2. We believe the impact on these packages will also be minimal,” he said.

At the close of trading on Friday, Sunway Construction was two sen better atRM1.57, WCT Holdings perked half-a-sen to 84 sen, Gamuda improved three sen to RM2.79, Muhibbah Engineering was flat at RM2.92, Gabungan AQRS shed two sen to RM1.02 and MRCB slipped one sen to 72 sen.

Danial added that since Pakatan Harapan’s victory in the 14th General Election, the sell down on the construction counters were overdone, which had unveiled attractive levels for entry.

“We opined that the recovery in share price has been underpinned by the evident valuation gap, supported by company-specific ability to weather the current industry pullback,” he said.

Asked on the challenges, he said contractors would move towards executing and completing the projects.

The conversion from project delivery partner to turnkey structure means contractors would need to bear the execution risk.

“Managing the risk well will likely translate to better margins in terms of the bottom line.

“In terms of prospects, we think the revival of the multi-billion ECRL project is most uncertain in the near-term and negotiations could still be prolonged due to challenges in reaching an amicable agreement between the stakeholders,” he added.

Prime Minister Tun Dr Mahathir Mohamad was reported as saying that the status of RM81 billion project was still unsure at this point of time.

Meanwhile, Dr Shahrin Nasir, Deputy Director (Industrial Linkages and Commercialisation), Malaysia Institute of Transport, Universiti Teknologi MARA said if the ECRL project was cancelled and the HSR postponed, it would affect the development of the rail sector.

“If Keretapi Tanah Melkayu Bhd can upgrade its electric train services, it would ensure that the rail industry remains important in the country.

“Current rail services need to be improved for the industry to remain relevant,” he concluded.

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