This article first appeared in The Edge Financial Daily on November 30, 2017

Construction Sector
Maintain overweight: Gamuda Bhd and Malaysian Resources Corp Bhd (MRCB) announced on Tuesday that they are collectively bidding for the project delivery partner (PDP) role of the Kuala Lumpur-Singapore high-speed rail’s (HSR) infrastructure construction on the Malaysian side.

The two groups will jointly bid under an unincorporated joint venture (JV), where Gamuda and MRCB have a 50% stake each. If the JV wins the PDP tender award, they will iron out a definitive agreement to set out the rights and obligations of each company under a formal JV, giving MRCB a potential major boost in the rail construction space.

This news is a positive surprise, more so for MRCB, which has been the “underdog” in the rail construction space. MRCB’s sole PDP track record is via the 50:50 JV with George Kent Malaysia Bhd as the PDP for the ongoing RM9 billion light rail transit Line 3 (LRT3) project (Bandar Utama-Klang).

For Gamuda, it appears that the group is now forging ahead to revive its PDP prospects. This comes after the change in the estimated RM40 billion mass rapid transit Line 3 (MRT3) (Circle Line) project from a PDP-based to an engineering, procurement, construction and commissioning (EPCC) model that is more suited to foreign players.

Year to date, Gamuda, MRCB, George Kent, and MMC Corp Bhd have emerged as the four local players with PDP experience in Malaysia. The latter two companies have expressed interest in bidding for the tender of the rail asset holder (AssetsCo), which would most likely eliminate them from being part of the PDP tender.

George Kent has signed a pre-consortium agreement with the Siemens group of companies for the HSR AssetsCo scope. Based on press reports quoting MMC group managing director Datuk Seri Che Khalib Mohamad Noh, MMC will be joining a Japanese consortium for the AssetsCo tender.

Based on the latest developments, both the AssetsCo and PDP tenders will be called next month, and are likely to be awarded by mid-2018.

As reported in the press, the total estimated value of the HSR project ranges from RM50 billion to RM60 billion. Based on our back-of-the-envelope calculation and going by the 50% to 60% PDP portion for MRT 1 and 2, the PDP scope for HSR could be worth RM25 billion to RM40 billion.

Working on the seven-year construction period for the HSR project and the benchmarked 6% PDP fee for HSR (similar to MRT and LRT), we roughly work out RM1.5 billion to RM2.4 billion of potential PDP profits over the construction period.

Therefore, the estimated PDP profit per annum for the Gamuda-MRCB JV, should it secure the contract, would be between RM107 million and RM171 million, representing a doubling of MRCB’s financial year 2017 (FY17) to FY19F net profit and 16%-21% of Gamuda’s FY19-FY20 net profit forecasts.

Gamuda remains our top big-cap rail pick  and MRCB is upgraded to an “add”, with a higher RM1.19 target price, based on a lower revised net asset value discount of 10%  — CIMB Investment Bank Research, Nov 29