Analysts mixed on MRT3 tender call, suggest foreign player to take up leading turnkey role

KUALA LUMPUR (Nov 7): Analysts have expressed mixed views on the proposal by Mass Rapid Transit Corp Sdn Bhd (MRT Corp) to call and invite construction and infrastructure firms to submit for a bid to build, on a turnkey basis, and finance the upcoming third mass rapid transit line (MRT3), estimated to cost around RM40 billion.

According to Nomura Securities Malaysia Sdn Bhd, the MRT3 tender process is a “negative surprise” that could potentially have negative implications on the Malaysian construction stocks, given MRT Corp has yet to finalise the alignment for the upcoming rail network.

At the same time, Nomura also noted that — based on its preliminary assessment — none of the Malaysian contractors seem to fulfil all of the technical experience criteria for the lead contractor role. 

With the additional requirement of providing financing for the project, Nomura said it believes a foreign contractor is likely to be the turnkey lead.

Noting that the turnkey contractor has to come up with a financing proposal for at least 90% of project value, which could potentially cost more than RM30 billion and a moratorium for the first eight years, Nomura said “such a huge financing commitment likely rules out any Malaysian contractor being the lead contractor, due to relative balance sheet risks.”

“We believe none of the Malaysian corporates are keen on the financing role, and will only choose to bid at the subcontractor level for portions of the Line 3,” Nomura’s Global Markets Research analysts Tushar Mohata and Alpa Aggarwal added in a note to clients today.

As for the impact on the local construction firms, Nomura said the MRT3 tender invite is negative for Gamuda Bhd, which has a history of being the biggest beneficiary due to its project delivery partner (PDP) role and healthy margins for tunnelling.

“If the PDP role is eliminated, it reduces profitability, and margins on sub-contract package tend to be lower,” Nomura added,

As for the smaller contractors, Nomura said there could be very few viaduct packages to bid, due to the smaller elevated stretch.

Contrary to Nomura’s negative surprise, CIMB Investment Bank Bhd is still positive on the local construction sector scene with an overweight call, despite MRT Corp changing the level-playing field.

According to CIMB analyst Sharizan Rosely, MRT Corp’s tender notice suggests construction of the MRT3 — which adopts the engineering, procurement, construction and commissioning (EPCC) approach — is likely to exclude the PDP model, which was previously applied MRT1 and MRT2.

The potential EPCC approach to build the MRT3 is similar to the project structure to build the East Coast Rail Link and the Kuala Lumpur-Singapore High Speed Rail, Sharizan added. 

In the case of ECRL, it is worth noting that China Communications Construction Co is turnkey contractor to build the RM55 billion rail network, stretching 688km and connecting between Selangor and three east coast states: Pahang, Terengganu and Kelantan.

“With the absence of a PDP model and the use of the EPCC model, we would not discount tender submissions by major international rail players, such as China and Japan forming EPCC consortiums with local contractors,” Sharizan said.

“Other contractors within our coverage could have equal chances of tendering for both turnkey and subcontract works,” he added, “but for now, we believe IJM Corp Bhd and WCT Holdings Bhd are potential turnkey contenders, given their past major rail track record and working relationships with China contractors.”

As for the entry of a foreign player as the potential lead turnkey contractor, Sharizan said it was based on the assumption that MRT Corp, which allows the project financing to be denominated in either one of the five different currencies, is implementing an international tender model.

The five current currencies are: Malaysian ringgit, US dollar, Chinese renminbi, Japanese yen or euro, and the minimum financing period of 30 years.

Appraising the upcoming 40km MRT3 at RM40 billion, Sharizan said the cost is potentially 25% higher than the estimated RM32 billion of cost to build MRT2.

Of the 40km MRT3 stretch, Sharizan said the cost to build the 8km above-ground portion could clock-in at RM3.4 billion, and the cost to construct the underground portion could come in at RM37 billion.

While MRT Corp has not revealed the preliminary alignment of the upcoming rail network, it was reported however that the MRT3 line is said to cover Ampang Jaya, Kuala Lumpur City Centre, Jalan Bukit Bintang, Tun Razak Exchange, Bandar Malaysia, KL Ecocity, Pusat Bandar Damansara, Mont Kiara and Sentul.

The MRT3 line is also said to be integrated with the first line (MRT1) stretching from Sungai Buloh to Kajang, and the second line (MRT2) connecting Sungai Buloh to Putrajaya via Serdang. — theedgemarkets.com

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