KUALA LUMPUR (April 5): While the roll-out of the Mass Rapid Transit 3 (MRT 3) augurs well for the construction sector, some analysts remain sceptical about the project due to political uncertainty and government funding constraint.

Hong Leong Investment Bank Research said in a note today that the development of MRT3 would serve as an upside catalyst for the sector, but it reckoned uncertainties regarding timeline as well as hurdles on various fronts (political, funding etc) remain its key concerns.

“As such, for the time being, we maintain our Neutral stance,” it said.

It also estimated the project costs should fall in the range of RM20 billion to RM22 billion with 1/3 of alignment underground.

“Based on our understanding, several key issues including funding remain unresolved.

“Additionally, we note that 2H21 might see an end to the current state of emergency which could spell further fluidity on the political front. We view this as key risks towards project implementation,” it said.

AmInvestment Bank Research’s analyst Joshua Ng who has upgraded the construction sector to neutral from underweight after the cabinet had given the green light to proceed with the MRT3 line, also has reservation on the project.

“The local political landscape remains dynamic, with a strong likelihood of the 15th general election being called immediately after the lifting of the nationwide state of emergency on 1 Aug 2021,” he said.

Given the government’s fiscal constraints, he also opined that the implementation model of the project may gravitate towards a public-private partnership of which the main contractor may be required to take on certain operating/commercial risk and/or participate in the funding of the project (East Coast Rail Link and Island A of the Penang Transport Master Plan are good examples).

“The construction period may be prolonged to lighten the stress on the government’s cash flow that means the earnings impact of the MRT3 project on construction companies may not be as significant as compared with the MRT1 and MRT2,” he added.

The minister’s statement on the MRT3 project aside, Ng said the fact remains that the government will have very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic.

UOB Kayhian’s analyst Muhammad Afif also said that due to the lack of visibility on the project's land acquisition, alignments, designs, and environmental impact assessment (EIA) status progress, it would be tricky to pin down an expected start date for the tender process to start.

He noted, the previous MRT2 project took about one year from the government's approval to the contracts’ award or groundbreaking ceremony.

“Besides that, the government's finances and political situation remain our key concern, as these could delay the project's rollout timeline,” he said.

Hence, he is not making any changes to his earnings forecasts or recommendation until he sees a more tangible and certain timeline.

Meanwhile, CGS-CIMB analyst Sharizan Rosely said, based on his rough estimates, the revised MRT 3 proposal may see cuts of 30% to 40% to the total original cost of RM45 billion, due mainly to the reduction of certain underground scopes.

This could bring the total estimated revised cost to between RM27 billion and RM32 billlion, he added.

“Cabinet approval lifts the overhang on the MRT 3 project but the speed of implementation, in our view, hinges on the finalisation of funding structure beyond the RM15 billion direct allocation for new public transport projects under Budget 2021.

“Whether the new MRT 3 comes with a private finance initiative (PFI) given the government’s limited room for a direct infra funding model remains to be seen,” he said.

To reflect the improved trading sentiment towards construction stocks on the back of the latest news, AmInvestment Bank’s Ng raised his benchmark forward target price to earnings (PE) for large- and mid-cap contractors to 14x from 12x (except for Gamuda to 13x from 11x to reflect its riskier order book with self-funded reclamation works for Island A of the Penang Transport Master Plan) and for small-cap contractors to 9x from 8x.

“As a result, we raise the fair values (FV) of construction stocks under our coverage by 6% to 17%. We upgrade Sunway Construction Group Bhd to hold from underweight, while maintaining hold for Gamuda, Hock Seng Lee Bhd and Kimlun Corp Bhd and underweight for IJM Corp Bhd and Econpile Holdings Bhd,” he said.

Ng does not have any top pick for the sector. However, for the purpose of anchoring a portfolio, he recommended Gamuda (Hold; FV RM3.49) and Sunway Construction (Hold; FV RM1.80).

As for Hong Leong Investment Bank Research, IJM (BUY, TP: RM1.95) is its top pick in the large cap space as a potential beneficiary of government’s infrastructure pump-priming spurred by its breadth of rail related construction experience.

“Against this backdrop, the company trades at an attractive price to book value of 0.63 time,” it said.

Within the mid-small cap space, it continued to like Sunway Construction (Buy, TP: RM2.01) due to its strong balance sheet, extensive track record of infrastructure projects and strong support from parent-co.

UOB Kayhian’s Muhammad Afif, who maintained market weight on the sector, opined that the positive newsflow would provide trading opportunities on potential beneficiaries such as Gamuda, IJM Corp, Malaysian Resources Corp Bhd (MRCB) and Sunway Construction.

CGS-CIMB’s Sharizan Rosely reiterated neutral call on the sector. He reiterated add calls on Gamuda, IJM Corp, MRCB and WCT Holdings Bhd as potential MRT 3 winners.

“Gamuda is our top play for the revived MRT 3 project,” he added.