MRT3 project a raindrop in long drought

TheEdge Tue, Mar 29, 2022 05:00pm - 12 months View Original

THE Bursa Malaysia Construction Index jumped 5% the day after MRT Corp Bhd announced that it was going ahead with the Mass Rapid Transit Circle Line (MRT3), whose initial estimated construction cost was RM31 billion plus land acquisition of RM8 billion.

This has been quite a big leap in recent years, given that investing interest has drifted from the construction sector simply because of the dearth of mega infrastructure projects.

The index hit a high of 156.63 points, from 147.4 points, after the good news, closing off its peak at 154.63 points last Friday.

The public rail project, however, did not prompt analysts to upgrade the construction sector. Most research firms are not that excited about the prospects of the construction industry, at least for now.

RHB Research has a “neutral” call on the industry, with its top picks being Sunway Construction Group Bhd (SunCon) and MGB Bhd. AmInvestment Bank Research and CGS-CIMB Research also have “neutral” calls on the sector, with Gamuda Bhd being the latter’s top pick of companies that will benefit from the MRT3 project.

PublicInvest Research has a “neutral” call on the sector, but it has an “outperform” rating on Gamuda Bhd and IJM Corp Bhd.

The MRT3 Circle Line project will be 51km in length, of which 40km will be on elevated tracks. While it is a big-ticket item that could provide a much-needed boost for the construction sector, the different funding approach this time around compared with the first two MRT projects could become an issue.

SunCon sees the MRT3 as a boost, not just for the construction industry but also for the economy as a whole, owing to the multiplying effects that the project would have.

“The MRT3 project will not only spur the construction sector but also many sectors of the economy, as it creates a positive multiplier effect, which is a necessary boost as we enter the endemic phase,” it says when contacted by The Edge.

SunCon is expected to be a suitable candidate for the elevated portion of the MRT3, given its involvement in the other two MRT projects, and has confirmed that it is keen on this portion.

The construction giant was awarded Package V4 for the MRT Sungai Buloh-Kajang Line, worth RM1.17 billion, for the construction of a 6.5km elevated viaduct guideway between the Section 16 station and the Semantan station in 2012. It was also involved in the construction of the MRT Sungai Buloh-Serdang-Putrajaya Line (MRT2) through the RM1.21 billion contract for the construction of viaduct guideways.

On top of that, it has worked on elevated tracks for the Light Rail Transit (LRT) Extension Line, LRT Line 3 (Johan Setia-Bandar Utama) and Sunway Bus Rapid Transit.

The MRT3 project is different from the first two lines because of the implementation of a hybrid financial model, which would see a public and private partnership (PPP) between the government and the contractors.

In a March 16 report, RHB Research analyst Adam Mohamad Rahim writes: “MRT3 would be financed via hybrid funding — which entails bonds including sukuk issuances, government guarantees and deferred payments. No mention was made of any private funding initiatives, but this should not be ruled out, given the country’s funding limitations.

“With that in mind, contractors are likely to bear some funding risks for the MRT3 project, should the private funding initiative be implemented.”

MRT Corp has yet to iron out the details of the private funding initiative, which raises questions about the capital requirement for the main contractors.

Against this backdrop, it is safe to assume that only construction companies with the strongest balance sheets are qualified to undertake the turnkey packages of the MRT3.

There will be two turnkey contractors for the elevated works, and one each for the underground portion, integrated rail systems and project management consultation.

Assuming contractors need to shoulder a 30% upfront cost, which will be reimbursed by the government through deferred payments, a construction firm will need to prepare a RM500 million credit facility to undertake a RM1.5 billion contract of the MRT3 project.

The bridging financing requirement gives the contractors a different cost aspect. There are five turnkey contractors, each of them will have to bear a substantial upfront cost.

The underground portion of the rail project is estimated to cost about RM11 billion. Assuming a 30% upfront cost, this means the turnkey contractor would have to fork out RM3.3 billion. Although this amount will be reimbursed by the government, it would definitely increase the risk for the turnkey contractor.

The joint venture (JV) between MMC Corp Bhd and Gamuda (MMC-Gamuda), which was contracted for the tunnelling jobs for the first two lines of the Klang Valley MRT project, has been perceived to be the front runner for the underground portion.

In the case of the East Coast Rail Link (ECRL), however, the tunnelling job was awarded to China Communications Construction Co Ltd, and the tunnel boring machine (TBM) was made in China, as opposed to the German-made TBM used by MMC-Gamuda.

If MMC-Gamuda wins the turnkey contractor job for the underground portion, each would need to have roughly RM1.65 billion in financing to kick-start the construction works, assuming an upfront cost of 30% of the total contract value.

PublicInvest Research sees the proposed hybrid financing model as reasonable as it gives the government flexibility in managing its financial constraints while the upfront construction cost as well as the execution risks are to be shared by all parties involved in the five main packages.

“Unlike the PDP (project delivery partner) and the turnkey contract model implemented in MRT1 and MRT2 (in this case, just MMC-Gamuda), the use of the PFI (private finance initiative) structure would stretch the burden solely to just one contractor,” the research house states in a March 16 report.

Besides SunCon and Gamuda, other construction groups being touted as potential beneficiaries of the MRT3 project include IJM and Malaysian Resources Corp Bhd (MRCB).

Both IJM and MRCB are involved in the LRT3 construction, with the latter being the turnkey contractor for the project. IJM is also involved in the MRT2 project via the RM1.47 billion contract for the construction of viaduct guideways between Jinjang and Jalan Ipoh North Portal.

The group was initially awarded a RM1.12 billion contract for the underground portion of the LRT3, but it was axed by MRCB George Kent Sdn Bhd, the turnkey contractor of the project, in mid-2019 after the Pakatan Harapan government scaled down the project.

IJM is touted to be a main contender for the turnkey contractor package, owing to its strong balance sheet after the group disposed of its entire stake in IJM Plantation Bhd to Kuala Lumpur Kepong Bhd for RM1.53 billion cash.

As at Dec 31, 2021, IJM’s gearing ratio stood at 0.51 times. Its cash balance stood at RM3.19 billion, compared with RM2.49 billion in 1QFY2022.

Besides the civil contractors, industrialised building system (IBS) and precast concrete producer Kimlun Corp Bhd is expected to benefit from the MRT3 project. The requirement for large precast segmental box girders and tunnel lining segment should bode well for the company.

Other smaller beneficiaries include Econpile Holdings Bhd for piling works, and Malayan Cement Bhd and Hume Cement Industries Bhd for the increased demand for cement. However, cement producers would have to contend with the rising price of coal.


The content is a snapshot from Publisher. Refer to the original content for accurate info. Contact us for any changes.

Related Stocks

BURSA 6.390
CIMB 5.160
GAMUDA 4.170
GKENT 0.485
IJM 1.580
KIMLUN 0.750
KLK 20.700
MGB 0.710
MRCB 0.325
SUNCON 1.670


Login to comment.