Gamuda, MMC lose RM2.6b in value after MRT2 underground job terminated

MMC’s ongoing projects will help cushion some of the losses incurred from the terminated MRT2 underground package

By MARK RAO / Pic By ISMAIL CHE RUS

MMC Corp Bhd and Gamuda Bhd lost a combined RM2.6 billion in market capitalisation after the termination of their underground works contract by Putrajaya for the Mass Rapid Transit Line 2 (MRT2) project.

The decision was made by the federal government after failing to get the MMC-Gamuda joint venture (JV) to reduce costs on the RM16.71 billion works portion as part of overall rationalisation efforts.

The underground project portion will now be called for international tender, Finance Minister Lim Guan Eng noted on Sunday.

In a joint statement yesterday, MMC and Gamuda said the terminated contract will result in immediate job losses of some of 20,000- strong workforce.

“This will cause unnecessary hardship to a significant number of the Malaysian workforce in an already slowing market,” the statement read.

“The termination will unjustifiably expose MMC-Gamuda to lawsuits for compensation from terminated employees, subcontractors, suppliers and manufacturers.”

MMC also told the exchange yesterday that it has yet to get an official notice on the cancellation.

Shares of Gamuda and MMC experienced heavy selling yesterday, resulting in the suspension of proprietary day trading and intraday short-selling of both counters.

AllianceDBS Research Sdn Bhd analyst Chong Tjen San said the contract termination will result in an estimated loss of RM5.5 billion in outstanding work for both companies respectively and will negatively impact their future cashflow.

“The sell-off is reflective of concerns over fundamentals as the market expected the MRT2 underground package to continue, but at a 20% to 30% cost reduction,” he told The Malaysian Reserve.

“The sell-off is warranted as construction represents a substantial chunk of both company’s business.” For Gamuda, he said the sell-off is negative from earnings, fundamental and investor sentiment perspectives.

“Coupled with the sale of its water concession asset, the company is looking at a big gap in earnings over the next two financial years,” he said. Chong added that the construction business is also a key focus of MMC going forward.

Gamuda earlier noted that the RM2.55 billion sale of its 40% shareholding in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd will have a negative impact on its earnings next year. The terminated MRT2 underground works contract will likely aggravate the decline.

The construction business contributed to over half of Gamuda’s revenue and represents a significant profit contribution, alongside its property and concession businesses.

Gamuda shares declined 78 sen or 24% to close at RM2.43 yesterday, wiping out RM1.93 billion from its market capitalisation with 92.7 million shares traded.

MMC fell 22 sen to close at RM1.13, losing some RM671 million in market capitalisation.

The engineering business contributed 36.5% to MMC’s revenue for its second quarter ended June 30 this year, chiefly supported by works on MRT2 and the Langat Sewerage Treatment project.

MMC’s ongoing projects — namely the Langat 2 Water Treatment Plant, Langat Centralised Sewerage Treatment Project and the Pan Borneo Sabah Highway — will help cushion some of the losses incurred from the terminated MRT2 underground works contract.

To recap, Gamuda and MMC were both appointed project delivery partners for the 52.2km MRT2 on a JV basis back in 2015 after their JV agreed to undertake both the above ground and underground works.

The 50:50 JV agreed to deliver the above ground works at a reduced rate of RM17.42 billion — 23% or RM5.22 billion lower than the original cost — but failed to reach an agreement for the underground package.

As at end of August this year, 37% or RM6.18 billion of the underground works were awarded, leaving a remainder RM10.53 billion in outstanding work.

The Pakatan Harapan-led government is striving to reduce the overall expenditure on the MRT2 project after its cost ballooned to RM56.93 billion from the initial RM28 billion estimate.

An additional line to Bandar Malaysia, a change in project scope and the ringgit’s depreciation all contributed to the increase in total cost.

The public rail line from Sungai Buloh to Serdang to Putrajaya was first approved by then Barisan Nasional-led government on Feb 26, 2014, and is expected to carry 529,000 passengers a day.