THE termination of IJM Corp Bhd’s underground work contract for the light rail transit line 3 (LRT3) project last Tuesday came as a shock to many in the construction industry.
Even analysts covering the stock say they did not see it coming as in its previous engagements with them, IJM had confirmed that the construction scope of the underground portion of the project would be reduced by RM400 million, signalling that the deal was still on, albeit smaller.
Preliminary work on the job had commenced before it was suspended in June last year. IJM says its wholly-owned subsidiary IJM Construction Sdn Bhd (IJMC) is currently seeking advice from its lawyers and will seek appropriate legal redress.
“At the time, our perception was that there was certainty about the contract, and that IJM would be able to start work on it,” says a construction analyst. “So when they announced the termination of the contract, it came as a surprise to us. This also raises questions as to the fate of the project’s other contracts, whether or not they will continue.”
To recap, on July 9, IJM announced to Bursa Malaysia that IJMC had received a notice of termination from MRCB George Kent Sdn Bhd (MRCBGK) cancelling its underground package contract of LRT3.
According to the announcement, the termination was due to the project’s framework being switched from project delivery partnership to fixed-price contract, as directed by the government. This resulted in MRCBGK’s employment as the project delivery partner (PDP) being terminated and novated to turnkey contractor, which meant that the contracts were now deemed to be awarded by MRCBGK instead of Prasarana Malaysia Bhd.
“Before the government changed the PDP model to turnkey contractor, the contracts were awarded by Prasarana. In January, Prasarana transferred the contract to MRCBGK under a contract novation agreement,” says another analyst. “So, in keeping with the new contract and the reduced budget and scope as announced by the government, MRCBGK and its subcontractors have to renegotiate all the contracts to determine the scope and the costs.”
The analyst reckons that MRCBGK and IJM could not agree on some of the issues regarding the underground work contract, thus the termination of the contract, which was worth RM1.16 billion, inclusive of the Goods and Services Tax.
Industry observers too are worried about the future of the other contracts related to LRT3. They say some of the contractors find the renegotiated contracts unfeasible to undertake and are meeting with senior government officials to discuss the matter. Some are even opting to withdraw from the project.
Analysts opine that the subcontractors need sureness about their contracts because some of them had signed theirs with Prasarana much earlier than IJM and had already leased or acquired the machinery needed to do their jobs.
LRT3 is a mega infrastructure project that was reviewed by the Pakatan Harapan government last year. The Ministry of Finance (MoF) discovered that the project’s original cost of RM9 billion had ballooned to RM31.65 billion, which it deemed unjustifiable, given the mountain of debt the fledgling government had to manage.
In July last year, the project’s cost was reduced to RM16.6 billion after a review of the line’s scale and projected ridership.
The loss of the underground work package has hammered IJM’s share price but RHB Research analyst Tay Yow Ken does not think that is detrimental to the group. He says as the contract would have been scaled down anyway, the termination has lifted all uncertainty over the contract. Worth RM1.16 billion, the contract made up about 14% of IJM’s total outstanding order book of RM7.8 billion.
“Notwithstanding the prospective loss of revenue arising from the loss of the LRT3 contract, we believe IJM’s construction division remains on sound footing. We expect construction revenue to increase at a CAGR of 5% for FY2020F to FY2022F,” Tay says in a report.
“This is underpinned by an ex-LRT3 outstanding order book of RM6.7 billion, comprising office building jobs, a retail mall, highways, a deepwater terminal and a mass rapid transit line 2 (MRT2) contract, which, in our view, are less likely to be subject to delays or cost overruns, given IJM’s track record.”
However, the same cannot be said of the other contractors whose contracts are still uncertain, especially those involving the five stations that have been identified by MoF to be shelved.
The companies whose contracts might be affected once all negotiations on the reduction of scope and costs with MRCBGK are completed include WCT Holdings Bhd, Gabungan AQRS Bhd, TRC Synergy Bhd, Mudajaya Corp Bhd and Sunway Construction Group Bhd.
Two of the shelved stations come under the contracts of WCT and AQRS while the remaining three are part of three packages awarded to privately owned companies.
On Oct 5, 2017, WCT was awarded the RM640 million, GS02 contract for the construction and completion of guideways, stations, park-and-ride facilities, ancillary buildings and other associated works from Merchant Square to Suria Damansara.
With the Lien Hoe stop as one of the five provisional stations under the revised plan, a reduction in the scope and cost of the GS02 package is highly probable. The same goes for AQRS’ GS04 package as the Temasya Glenmarie stop is one of the shelved stations.
Hong Leong Investment Bank analyst Yip Kah Ming says about 10% to 15% of WCT’s LRT3 outstanding order book of RM1.36 billion is subject to reduction after taking into account the downsizing of the project and the shelving of the Lien Hoe station. However, he opines that WCT’s total construction order book of about RM6 billion is still healthy, translating into a healthy cover of 3.2 times its FY2018 construction revenue.
“Given the substantial amount of jobs secured last year (worth RM2.67 billion), the focus will be on the execution of the jobs in hand. Thus, the FY2019 order book replenishment target is much less at RM1 billion,” says Yip in a May 28 report.
The LRT3 contracts contribute about 21% to WCT’s total outstanding order book.
As for AQRS, the value of its GS04 contract is RM1.21 billion — one of the largest packages awarded. As at May, its construction order book stood at RM2.4 billion, including the LRT3 contract.
None of the analysts is expecting AQRS’ LRT3 contract to be terminated or knows if the group intends to withdraw from the project. But their confidence aside, the analysts are in the dark about the reduction in the scope of the contract. At the same time, they are sure the reduction will not be severe.