Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on April 16, 2019

KUALA LUMPUR: The revival of the East Coast Rail Link (ECRL) project is considered as positive news but the market has already factored it in.

Share prices of rail contractors have on average risen 44% year to date, which is likely to have already reflected the optimism on the potential project revival, CIMB Research commented. “At these levels, we believe the positives are largely in the price.”

Last Friday, the government announced that the government will proceed with the ECRL project at a reduced cost of RM44 billion, 32.8% lower than its original cost of RM65.5 billion.

A supplementary agreement was signed between Malaysia Rail Link Sdn Bhd and China Communications Construction Co Ltd (CCCC) covering the engineering, procurement, construction and commissioning (EPCC) aspects of the ECRL. The railway will now be 648km — 40km shorter than previously — and pass through Jelebu, Negeri Sembilan, instead of Gombak in the Klang Valley.

CIMB Research, however, maintains its “underweight” rating on the construction sector pending more details on the EPCC terms and tender portions for local contractors, which may form upside risks for local players.

“Under our coverage, potential beneficiaries include IJM Corp Bhd, Sunway Bhd (via Sunway Construction Group Bhd) and WCT Holdings Bhd,” said CIMB research.

IJM Corp closed two sen or 0.88% lower to RM2.25, while Sunway Construction rose three sen or 1.55% to RM1.96. WCT also closed higher by 0.5 sen or 0.52% to 96.5 sen.

Malacca Securities Sdn Bhd senior analyst Kenneth Leong concurred that most contractors have likely already reacted to the news beforehand. Any fresh catalysts for buy-in would be updated on the terms for local contractors, he said.

“Stocks to look at would be IJM Corp as it has experience in road and rail projects. Gamuda Bhd and Gadang Holdings are also contenders,” he told The Edge Financial Daily when contacted.

Gamuda closed six sen or 1.88% lower to RM3.13, while Gadang lost 2.5 sen or 3.52% to settle at 68.5 sen.

Shares of building material stocks such as Lafarge Malaysia Bhd and Press Metal Aluminium Holdings Bhd, which are also said to be contenders to benefit from the ECRL project had traded in positive territory early yesterday before paring gains at market close.

Lafarge Malaysia closed three sen lower or 1.21% to RM2.45, while Press Metal closed unchanged at RM4.53. Ann Joo Resources Bhd also ended eight sen or 4.47% lower to RM1.71.

In a research note yesterday, AllianceDBS noted that the revival of the ECRL project is a small win as it is likely that CCCC would also revive the cement supply contract (worth RM270mil then) signed with Lafarge in 2016. The contract was cancelled last year following the suspension of the project.

“We estimate if the RM270 million contract remains, this will translate into [about] 1.2 million tonnes of cement demand – spread over the next four years, equivalent to 300,000 tonnes per year. This is relatively small compared to Lafarge’s effective capacity of 8.2 million tonnes. As such, we think that more infrastructure projects are needed to support demand,” said AllianceDBS.

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