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PETALING JAYA: The scrapping of the the MRT3 project, known as the Circle Line yesterday – two days after the Kuala Lumpur-Singapore High Speed Rail (HSR) project termination – worked to drive local construction stocks further into the doldrums, falling another 24.42 points or 10.87%.
Gamuda Bhd saw the hardest hit, skidding 95 sen or 23% to close at RM3.18 on some 32.82 million shares done.
Malaysian Resources Corp Bhd (MRCB) fell 11.5 sen or 16.8% to 57 sen, while YTL Corp Bhd slipped 9 sen or 8.8% to 93 sen. A total of 52.5 million and 92.02 million shares were traded for both counters, respectively.
Gamuda-MRCB consortium was appointed as the project delivery partner (PDP) for the northern section of the HSR project, while the southern section was given to YTL-THP joint venture.
Gabungan AQRS also saw the suspension of the short-selling activity of its shares after it declined more than 15 sen or 15% from its reference price. At market close, it was down by 20.5 sen or 22.8% to 69.5 sen with some 9 million shares changing hands.
In a research report yesterday, AmResearch said the government’s decision to scrap the HSR project appears to be a wise move as the project cost is more likely to outweigh its economic benefits.
“This project can take longer than envisaged to break even given the stiff competition with other modes of connectivity such as road and air. Much will depend on the pricing of the ticket and ridership.”
AmResearch said although there will be some negative impact from the scrapping of this project in terms of spillover effects, it believes the impact may not be significant.
The cancellation may cost the government up to RM500 million in penalty, equivalent to 0.45% of the total project cost, which seems manageable, it said.
“The move has given some breathing space on savings, especially with the high public debt which is at RM1.09 trillion or 80.3% of the GDP,” it added.
Following the HSR termination, AmResearch downgraded Gamuda Bhd to “hold” from “buy” call with a 35% cut in fair value to RM3.89 from RM5.95 previously.
The research house believes that the prospects of the local construction sector have weakened as the government reconsiders various mega infrastructure projects on grounds of fiscal prudence.
“Apart from the KL-Singapore HSR, we believe more mega projects could potentially be deferred, scaled down or cancelled.”
In addition, it said, the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for players.
“Not helping either, are the prolonged downturn in the local property market that weighs on Gamuda’s property division, coupled with the uncertainty arising from the potential expropriation of Gamuda’s toll road and water concessions,” AmResearch added.
PublicInvest Research also lowered its call on Gamuda from “outperform” to “neutral” in light of increasing de-rating catalysts, with a cut in target price to RM4.30 from RM6.20 previously.
“We make no changes to earnings estimates as we had not accounted for the HSR project in our forecasts. Toll-related contributions will be adjusted accordingly upon clarity of takeovers, the research house said.
Meanwhile, Kenanga Research reiterated an “outperform” call on MRCB with no changes to its FY18-19 earnings given that construction work on HSR was expected to only kick off in 2020. However, its target price has been revised downward to 90 sen from RM1.15.
It highlighted that it remains positive on MRCB’s prospects for the potential sale of the Eastern Dispersal Link in Johor Baru, which will be a catalyst for the stock.
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