Investors turn negative as revised MRT2 underground package indicates that future projects will not be as lucrative as before
by MARK RAO & DASHVEENJIT KAUR / pic by MUHD AMIN NAHARUL
Gamuda Bhd’s share price dropped 12 sen to RM2.35 yesterday, erasing RM296.4 million of the construction giant’s market value, despite the announcement that the underground work termination for the Mass Rapid Transit Line 2 (MRT2) has been rescinded.
The government last Friday reinstated MMC-Gamuda KVMRT (T) Sdn Bhd for the underground portion of the 52.2km rail line, but with RM3.6 billion in cost cut, more than the RM2.13 billion initially offered by the joint-venture (JV) company.
The cost reduction stirred worries among investors as this means the construction costs for the underground works had been slashed to RM13.11 billion from the original RM16.71 billion.
The project owner had also shelved two stations planned at Bandar Malaysia.
MMC Corp Bhd’s share price also dropped yesterday by six sen to RM1.10.
AllianceDBS Research Sdn Bhd analyst Chong Tjen San said the market is reacting to the expected margin pressure and indications that future construction awards will be less attractive.
“Investors are negative on the sector as a whole as the revised package indicates that future projects will not be as lucrative as before,” he told The Malaysian Reserve.
“MMC-Gamuda further agreed to a larger haircut than they had initially planned for and at RM3.2 billion each for the remainder tunnelling works, it will have a large impact on their margins.”
BIMB Securities Sdn Bhd analyst Mohamad Khairul Fahmi said Gamuda is staring at a larger margin erosion due to the agreed price cut.
However, he said the research firm had upgraded the stock to a ‘Buy’ at a higher target price (TP) of RM3.35, 21.8% higher than the initial RM2.75 TP, due to its oversold position and long-term earnings visibility.
“In our view, the uncertain outlook for the sector with regard to ongoing major projects are starting to diminish as the government settles in. As such, we note that the share price correction is overdone,” he said in a report.
“At the current price level, we believe the stock offers a compelling investment case given the stable income stream up to the 2022 and 2023 fiscal years (FY22 and FY23), while our dividend per share forecasts imply attractive dividend yields of close to 5%.”
MIDF Amanah Investment Bank Bhd Research said the project’s continuation seems a rational avenue for the group to manage the risk at hand.
“The hefty haircut arrived and offered by MMC-Gamuda means that total earnings contribution would probably be marginal once completed as a result of widening margin compression.
“Given the revision, we are expecting a conservative sum of RM49.2 million from the underground contract on top of Gamuda’s annual profit estimate,” it said in a note yesterday.
Kenanga Investment Bank Bhd analyst Marie Vaz said the fact the JV is allowed to proceed with the underground works is positive for MMC, which initially expected to lose 43% to 63% in core net profit from FY19 to FY20.
“We raise our FY18 to FY19 core net profit estimates by 46% to 62% to RM88 million to RM76 million post-accounting for the renegotiated tunnelling works into our forecast,” she said in a report.
Affin Hwang Capital Research upgraded Gamuda to a ‘Hold’ from a ‘Sell’, following the sharp correction in its share price, with a higher TP of RM2.70 compared to RM2.55 previously.
Maybank IB Research also upgraded Gamuda to a ‘Hold’ from a ‘Sell’ with a 9% upside from 5% on its new TP of RM2.70, after re-including the MRT2 underground contract into its forecasts, albeit at lower margins.
“Despite the earnings accretion from the underground package, FY19E-FY21E are still expected to see negative earnings growth.
“Overhang remains on its future orderbook replenishment and highway concessions,” it said in a note yesterday.
On MMC, Kenanga raised its call to ‘Outperform’, but with a lower TP of RM1.30 from RM1.45.
“We are positively surprised as we did not expect the re-appointment of the JV in light of the sudden termination recently.
“As such, we laud both the government and MMC-Gamuda for their efficiency in concluding the renegotiation in this limited timeframe,” it said in a note yesterday.
The JV company had agreed to undertake the above ground portion of the works at a 23% reduced rate of RM17.42 billion.
However, it failed to reach a consensus for the underground segment, forcing the government to terminate the contract and to sought a retendering of the project.
Some workers claiming to be from Gamuda had turned to social media to lambast the government’s decision to terminate the project.
But the parties have agreed to a RM3.6 billion cost cut, allowing the JV company to undertake the MRT2 project on a turnkey contract basis with total cost reduced by 22.4% to RM30.53 billion from the original RM39.35 billion.
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