Sector Update | Monday, 7 March 2022

CONSTRUCTION Upgrade to POSITIVE

Laying the tracks of recovery (From NEUTRAL)
KEY INVESTMENT HIGHLIGHTS
• MRT3 Circle Line has been given the green light by the Prime Minister, earlier than market expectations
of 2QCY22
• MRT3 will have a length of about 50km, with a circular alignment running along the perimeter of the
Kuala Lumpur city
• Construction of the MRT3 has been projected to spread over a 10-year period which in our view, is a
positive for the industry players due to the hefty order book replenishment for construction companies
• MRT3 could potentially cost RM31.22b in our view, of which RM19.4b is for the underground portion
• Upgrade recommendation on sector to POSITIVE with our top picks: Gamuda (BUY, TP:RM4.20), IJM
Corp (BUY, TP:RM1.90), Sunway Construction (BUY, TP:RM1.80), Gabungan AQRS (BUY, TP:RM0.64) and
Malayan Cement (BUY, TP:RM3.00)
Third time’s the charm. It was perhaps the single most awaited piece COMPANY IN FOCUS
of news by the construction fraternity and investors. YAB Prime Minister Gamuda Bhd
Datuk Seri Ismail Sabri Yaakob announced the approval of the Klang Valley Maintain BUY | Unchanged target price: RM3.63
Price @ 4th March 2022: RM3.16
Mass Rapid Transit Line 3 (MRT3) project on Friday afternoon. This came
• Vast experience in MRT1 and MRT2
much ahead of the market’s expectations for an announcement of the • Frontrunner in clinching lion’s share of MRT3
mega project in 2QCY22, which is definitely positive news. Recall that in • Bagged about 73.7% of its orderbook
replenishment target for FY22
2017, MRT Corp, being the project developer and asset owner of MRT3,
• Strong unbilled order book of about RM11.2b
issued a tender notice in November, but the project was scraped in May Share price chart
2018 after Pakatan Harapan took over Federal administration. Another
change of Government happened in March 2020 which led to Perikatan
Nasional taking charge and the Cabinet approved MRT3 about a year later
in April 2021. While tenders were expected to be called in August 2021,
the powers that be in Putrajaya changed hands again, which led to a delay
in the project, until the most recent announcement, effectively making it
the third time MRT3 received an approval. While no further detail was
IJM Corp Bhd
announced, we posit that tenders for the project may potentially be called Maintain BUY |Unchanged target price: RM1.90
by 2HCY22 or earliest, by 2QCY22. Price @ 4th March 2022: RM1.49
• Strong portfolio of undertaking rail projects
What we know about MRT3 so far. Also known as the Circle Line, Beneficiary of impending revival of mega public
transport projects such as MRT and LRT3
MRT3 is the third and final line of the KVMRT. MRT3 will have a length of
• Solid outstanding order book of about RM4.51b
about 50km, with a circular alignment running along the perimeter of the which translates into earnings visibility for the
Kuala Lumpur city. It is the final puzzle to connect the whole of Klang next 3-4 years
• Strong contender for jobs in MRT3
Valley. It will comprise elevated and underground sections and have 31
Share price chart
stations. Based on previous briefings and news reports, about 40% of the
alignment or 20km would be running underground, which means about
30km of the alignment would be elevated tracks. Construction of the MRT3
has been projected to spread over a 10-year period which in our view, is
a positive for the industry players due to the hefty order book
replenishment that will keep them busy over the next decade. There will
be about 30 stations, including 10 expected interchange stations.
Compared to the initial plans in 2017 when MRT Corp called for the tender
on a turnkey basis, MRT3 was initially scheduled to be 40km in length,
32km of it being underground and a total of 26 stations, of which 19 would
be underground. MIDF Research
research@midf.com.my
Construction Sector Update

Monday, 7 March, 2022

07, 2022

Figure 1: MRT3 alignment

Source: MRT Corp, The Star

How much would it cost? When the project was scraped in 2018, it was speculated that the cost was about RM40b
to RM50b. Going by previous news reports, the revised cost of MRT3 could range from between RM27b and RM32b. In
comparison, the Putrajaya Line, better known as the MRT2, costs RM30.5b with its alignment of 57.7km comprising
44.2km of elevated tracks and 13.5km underground with 36 stations. We opine that the final cost for MRT3 may come
up higher than MRT2 due to its higher underground portion of 40% as compared to 23.4% of the MRT2, as tunneling
works are more labour intensive, coupled with the high cost of heavy machineries needed such as the tunnel boring
machines. The underground portion of MRT2 costs RM13.1b while its elevated tracks cost RM17.4b. Using this as a like-
for-like comparison, MRT3 could potentially cost RM31.22b in our view, which is RM19.4b for the underground portion
and RM11.82b, based on the cost of RM970.4m per km underground and RM393.7m per km of elevated track. The cost
may potentially be higher for MRT3 than what was previously speculated due to the surge in prices of raw materials.
MRT Corp has previously proposed a hybrid financing model for the project where it may be expected to tap on the
private financing initiative (PFI).

Potential beneficiaries. The announcement of the MRT3 approval has come in timely as a short in the arm for the
rather muted construction sector where most firms are all dressed up with nowhere to go in recent years. Considering
the sheer size of the MRT3 project, we opine that the contract would be awarded in packages, such as what was seen
in MRT2, which was split into the underground segment, stations, segmental box girders, viaducts and others. The
underground package will most likely be the largest contract and we expect the major early beneficiary to be Gamuda
(BUY, TP: RM3.63), which would also go on to hold the lion’s share of MRT3. The group, which is the largest
construction company in the country based on market capitalisation, is as good as shovel ready for the project, premised
on its JV outfit MMC-Gamuda with vast experiences in MRT1 and MRT2. Just recently, Gamuda was also awarded a
RM6.5b tunneling project in Sydney and a RM1.45b contract to build a station and two tunnels in Singapore, together
with its Singapore JV partner, which are testaments to its tunneling expertise. Another potential front runner is IJM Corp,
which is no stranger to mega projects like this. We like IJM due to its strong portfolio of undertaking rail projects such
as the excavation of underground tunnels for a portion of LRT3, and also the construction of MRT stations and viaducts.
Among other beneficiaries include those that were previously involved in MRT2, such as Sunway Construction (BUY,
TP: RM1.80), WCT Holdings (BUY, TP: RM0.80), Gabungan AQRS (BUY, TP: RM0.64), MRCB (NEUTRAL, TP:
RM0.36) and Malayan Cement (BUY, TP: RM3.00).

Upgrade to POSITIVE. A stated in our 2022 outlook for the construction sector, MRT3 is a potential rerating catalyst
of the sector. We opine that the earliest we may see the first MRT3 contract would be in 2023, taking into consideration
Construction Sector Update

Monday, 7 March, 2022

07, 2022

the tender process and the finalisation of the Government’s public private partnership (PPP) 3.0 model, which is expected
to be announced in mid-2022. Once the MRT3 ball starts rolling, it is expected to keep the construction players busy for
the next decade with strong order book replenishments whilst providing them with the earnings visibility. While there
could potentially be delays in the roll out of the project due to multiple factors, we believe that the improving inflow of
jobs, domestically and overseas, will be able to keep most of the construction companies under our coverage engaged
until they are able to start reaping the fruits of MRT3. For example, Gamuda (BUY, TP: RM3.63), which remains our
clear favourite, has bagged about 73.7% of its orderbook replenishment target for FY22, just from overseas projects.
IJM Corp (BUY, TP: RM1.90), boasts a sizeable outstanding order book of RM4.51b, giving it an earnings visibility
over the next three to four years. Construction activities, which are now allowed to resume in full force, will also speed
up the progress billings of ongoing projects. We also have BUY calls on Sunway Construction (TP: RM1.80),
Gabungan AQRS (TP: RM0.64) and Malayan Cement (TP: RM3.00). All factors considered, we are upgrading our
recommendation on the sector from NEUTRAL to POSITIVE on the back of our optimistic outlook on the sector.
Construction Sector Update

Monday, 7 March, 2022

07, 2022

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (197501002077(23878 – X)).
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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >10% over the next 12 months.

Stock price is expected to rise by >10% within 3-months after a Trading Buy rating has been assigned due to
TRADING BUY
positive newsflow.

NEUTRAL Total return is expected to be between -10% and +10% over the next 12 months.

SELL Total return is expected to be <-10% over the next 12 months.

Stock price is expected to fall by >10% within 3-months after a Trading Sell rating has been assigned due to negative
TRADING SELL
newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

ESG RECOMMENDATIONS* - source Bursa Malaysia and FTSE Russell

☆☆☆☆ Top 25% by ESG Ratings amongst PLCs in FBM EMAS that have been assessed by FTSE Russell

☆☆☆ Top 26-50% by ESG Ratings amongst PLCs in FBM EMAS that have been assessed by FTSE Russell

☆☆ Top 51%- 75% by ESG Ratings amongst PLCs in FBM EMAS that have been assessed by FTSE Russell

☆ Bottom 25% by ESG Ratings amongst PLCs in FBM EMAS that have been assessed by FTSE Russell

* ESG Ratings of PLCs in FBM EMAS that have been assessed by FTSE Russell in accordance with FTSE Russell ESG Ratings Methodology