Tuesday, 14 February 2012

Gamuda JV formalises role in Klang Valley MRT project

Gamuda Bhd (Feb 13, RM3.85)
Maintain buy with revised fair value RM4.57 from RM4.46: Gamuda announced on Bursa Malaysia last Friday that its jointly controlled entity, MMC Gamuda KVMRT (PDP) Sdn Bhd, has signed an agreement with MRT Corp to formalise its status as the project delivery partner (PDP) for the Klang Valley My Rapid Transit (KV MRT) project. Under the agreement, the PDP will receive a 6% fee on the aggregate contract value for all of the project’s works packages.

The agreement states the PDP is fully responsible and held accountable for due performance by all the contractors awarded works packages. In the event any of the contractors fail or default in their performance, the PDP has the obligation to step in and deliver the remaining works on its own.

Should the PDP complete the project within the agreed target cost, it will be paid a fee of 6% of the aggregate of all the awarded works contracts (excluding the value of the underground works package if the PDP wins the Swiss Challenge).

If the project exceeds the agreed target cost, the PDP shall be liable for the cost overrun via a reduction of the fee entitled based on an undisclosed formula.

The target completion date for the entire Sungai Buloh-Kajang (SBK) line is set for July 31, 2017. Should the PDP fail to complete the project by the agreed completion date, it is liable to pay to MRT Corp an agreed liquidated damage of RM500,000 per day.

Save for the underground works, the PDP is not allowed to participate in any of the tenders for the KV MRT works. If the MMC-Gamuda JV is awarded the underground works package, the management and supervision of that portion will be undertaken by MRT Corp itself.

Given the JV’s tender pricing advantage, the government’s preference for local contractors as well as its previous experience with the SMART Tunnel and Kaohsiung MRT, we continue to rate as high MMC-Gamuda JV’s chances of clinching the tunnelling works worth as much as RM8 billion for the SBK line, which we expect to be made known by April 2012.

The announcement and agreement terms are within our expectations. Although the total value of the SBK line will only be known after all the 90 work packages are awarded by 2H12, we estimate Gamuda’s share of profit at approximately RM360 million from the management fee on the SBK line alone, assuming a total contract value of RM12 billion for the elevated portion.

Taking a conservative stance to account for potential delays in construction as well as a possible variation order exceeding the 15% buffer due to unforeseen fluctuations in prices of building materials, we are incorporating half of the agreed 6% management fee (which translates into RM180 million for Gamuda’s share of profit), spread evenly from mid-2012 to end-2016.

We bump up our FY13 earnings by 5.5% and FY14 by 4.7%, leaving our FY12 estimates unchanged, as we assume that contribution will only come in by mid-2012.

Maintain “buy”, at a revised fair value of RM4.57 (from RM4.46 previously), based on our sum-of-parts valuation as we see more positive news in the run-up to the official award of other packages on the KV MRT SBK line. — OSK Research, Feb 13

This article appeared in The Edge Financial Daily, February 14, 2012.

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