Rail boost for construction

Next phase: A MRT train heading towards Kajang from Kuala Lumpur. MRT3, which is being touted as the rail story for 2018, has not been granted Cabinet approval.

Next phase: A MRT train heading towards Kajang from Kuala Lumpur. MRT3, which is being touted as the rail story for 2018, has not been granted Cabinet approval.


PETALING JAYA: Contract awards related to rail works continue to boost the construction sector with more to come.

This week alone, some RM4bil worth of Light Rail Transit Line 3 (LRT3) contracts were dished out to three companies, which brings to a total of RM7.4bil worth of LRT3 contracts awarded so far.

CIMB Research said it understood that Prasarana Malaysia Bhd, the project owner of LRT3, still has seven major civil work packages to be awarded for LRT3, which is expected to be concluded by year-end.

Besides the recently launched East Coast Railway Link (ECRL), the next big series of awards are said to be coming from Mass Rapid Transit 3 (MRT3) in the Klang Valley.

It was recently reported that the Government may consider expediting the construction of MRT3 (Circle Line).

This proposed rail link is estimated to cost RM35bil-RM40bil and expected to be completed two years earlier than the original 2027 target, CIMB Research said in a report.

MRT3, which is being touted as the rail story for 2018, has not been granted Cabinet approval.

CIMB Research said it understood that this approval is targeted to be achieved by mid next year. It will then take at least another six months from Cabinet approval to project awards.

So, it is little surprise that the construction sector index on Bursa Malaysia has been on the uptrend, having risen 15.39% as compared to the broad market’s 7.45%.

A key question though is whether these contracts will translate into hefty profits for the winners.

One concern is that construction companies don’t necessarily earn as much as investors hope they do because it is not known the actual cost they have incurred in securing these projects. Large players also have a much higher cost base.

Macquarie Research said that based on its checks with the contract winners, it expected LRT3 to bring a gross margin of between 8% and 11%.

Based on this, Gabungan AQRS Bhd, which last week secured a RM1.2bil GS04 package to build guideways and three stations over a 4.2km stretch of the LRT3 alignment, is estimated to see its financial year 2018 (FY18) and FY19 earnings grow by 8% to 12% in tandem with the project timeline.Its larger-than-expected order win brought the company’s order book to RM2.81bil – a jump of 86% from RM1.4bil as at end of last year.

Notably, the LRT3 award is Gabungan AQRS’ first major rail contract and put it in a better position to bid for other rail-related projects in the future such as East Cost Rail Link and KL-Singapore High-Speed Railway, said analysts.

Analysts have also upgraded the stock and raised their target prices. Shares of the mid-cap construction player rose 101.11% year-to-date to hit an all-time high of 1.82 on Friday.

In the case of Sunway Construction Group Bhd (SunCon), the RM2.2bil LRT3 contract won has brought the value of jobs secured so far this year to a whopping RM3.8bil.The contract bumps up its outstanding order book by more than half from RM4.3bil as at end of second quarter 2017 to RM6.5bil, closing in to the order books of big-cap IJM Corp Bhd’s RM8.7bil and Gamuda Bhd’s RM7.8bil, said CIMB Research.SunCon’s order book also comprised mostly rail works related to MRT2 and LRT3, it added.

Assuming a pre-tax profit margin of 6%, TA Research expects the construction giant’s FY18 and FY19 earnings to grow by 12.9% and 15.5% respectively, contributing a net profit of about RM96.7mil throughout the contract period.

It has upgraded the stock from a “sell” to “buy” on the back of stronger earnings visibility over the next three years.

WCT Holdings Bhd is a big beneficiary of LRT3, having won three packages worth RM1.7bil.The company’s outstanding order book has hit RM5.5bil, providing steady earnings for its construction division for the next three years, but its dwindling property sales and high gearing levels are areas of concern.

Alliance DBS noted that WCT’s current focus on clearing inventory via incentives and rebates would have a negative impact on margins, while the timeline for some initiatives to raise funds had been delayed.

“WCT is also bidding for construction contracts such as the Bus Rapid Transit (BRT) project, which may result in higher cashflow constraints in the immediate term.”

The stock, which closed at RM1.79 on Friday, is down by about 22% from its peak.

According to CIMB Research, IJM Corp and Muhibbah Engineering (M) Bhd could be among the next winners of LRT3 – a double-track rail alignment of 37km covering the areas of Bandar Utama, Shah Alam before ending at Johan Setia in Klang.

Gamuda Bhd remains a contender for the 2km underground package, though it may not be a frontrunner, given the potential change in specifications and alignment.

There’s also spillover effect to the piling and substructure players, whose beneficiary could be the likes of Econpile Holdings Bhd, which is a long-term client of Gabungan AQRS.

According to Macquarie Research, based on its checks with the piling players, 7%-9% of the contract value would likely consist of piling and substructure works.



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