KUCHING: Analysts are generally still optimistic on MMC Corporation Bhd (MMC) and Gamuda Bhd (Gamuda) despite the federal government recently terminating the MMC-Gamuda joint venture (JV) as the main contractor for the tunnelling works of Mass Transit Line 2 (MRT2).
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) was negatively surprised by this latest development on the MRT2 as it did not foresee cancellations for the on-going construction project.
“Following the contract termination of MRT2 underground works for MMC-Gamuda and the 23 per cent reduction for the remaining underground works, the effective remaining orderbook for MMC hovers below RM10 billion from RM14.9 billion previously,” it said.
For Gamuda, MIDF Research is expecting about eight per cent to 11 per cent of potential earnings reduction for every quarter in financial year 2019 to 2022 (FY19-20-21-22) to the tune of RM24 million to RM26 million.
Cumulatively, this accounted for 11 per cent and 13 per cent of the research arm’s and consensus full year 2019 estimates.
It noted that the underground portion of MRT2 contract carries an outstanding orderbook value of RM5.6 billion, with project completion spans until May 2022.
“On top of this, we understand that the above-ground contract value has been reduced by 23 per cent, with the JV’s previous role as a project delivery partner (PDP) has now switched to a turnkey contractor.
“Based on the new remaining contract value of RM4.4 billion, we are estimating a full year net profit contribution of RM55 million to Gamuda.
“It is notable that this is a reduction of 29.9 per cent from the previous contract.”
However, MIDF Research highlighted that an advantage of being a turnkey contractor is that MMC-Gamuda would be able to participate in the re-tendering process of the underground works.
The research arm viewed that MMC-Gamuda would stand a fair chance of succeeding in the next bid given the JV’s expertise demonstrated in past projects, albeit at a more competitive value.
“We are not ruling out the possibility of Gamuda and MMC to participate in the retendering process, if an agreement is reached.
“Assuming that both entities are able to reduce cost, we believe the outcome will be positive,” MIDF Research said.
While the abovementioned matter is a drag on earnings, MIDF Research opined that MMC’s profitability will be buttressed by the group’s ports segment as highlighted in its previous note on September 26, 2018.
The research arm recalled that MMC is the largest port operating group in Malaysia with a 58 per cent market share of the nation’s container market.
MIDF Research was also still upbeat on Gamuda’s earnings growth prospect based on the group’s strong orderbook and healthy contribution in the property segment.
“On the property segment, we remain optimistic on its medium term outlook predicated on the completion of construction works at 661 Chapel Street, Australia and potential of better take-up rates in the domestic market.”
Interestingly, MMC-Gamuda’s joint media statement on October 8 revealed that the JV had so far not received any communication nor notification from MRT Corp, the counter party to the award of the project.
“Thus, there has been no official confirmation from MRT Corp that MMC Gamuda has been terminated as underground contractor,” the JV said.