ECRL review to put RM130 million contracts into limbo
KOTA KINABALU: Depending on the outcome of the East Coast Rail Link (ECRL) mega infrastructure project, HSS Engineers Bhd (HEB) may faces the risk of having RM130.4 million worth of contracts being suspended or cancelled.
Under the new Pakatan Harapan government, the ECRL along with other mega infrastructure projects have been placed under review to determine whether they are viable.
On Tuesday (July 3), the Finance Ministry revealed that the final cost of the ECRL project is RM81 billion and guided that the project cost would require to be reduced significantly in order to be financially viable.
The ECRL, which was previously estimated to cost RM55 billion, ballooned to the RM81 billion figure, based on the previous government’s plan to extend the line to Port Klang, Selangor and Pengkalen Kubor, Kelantan, and expand the line to a double track.
Finance Minister Liam Guang Eng has also guided in a statement that the Selangor state government is objecting strongly to the completion of the Gombak-Port Klang portion of the project.
Should the ECRL project revert back to original plans with lines, running from Gombak, Kuala Lumpur, Kota Bahru and Kelantan on a single track, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) reckoned that the cost could be reduced to about RM40 billion.
No further updates on the status of the ECRL has emerged so far. However, for now, the ECRL project owner Malaysian Rail Link Sdn Bhd, has ordered the main contractor China Communications Construction Co Ltd to suspend all works on the project, for the time being.
As the current review of largescale projects will undoubtedly affect the award of new contracts over the next six to 12 months, Affin Hwang Capital has taken a more conservative stance and slashed its earnings estimates for HEB.
“We believe it will be challenging for HEB to secure new contracts in FY18. We cut our FY18, 19, and 20E new contract assumptions to RM1, RM150, RM250 and million from RM94, RM200, and RM350 million previously.
“We also remove earnings contribution from the RM104m remaining contract value for the ECRL, given the potential suspension of work, in our new FY18 to FY20E EPS forecasts.
“This leads to a cut in EPS by 4 to 26 per cent in FY18 and 20E,” guided the research arm.
However, even after a cut in their earnings per share (EPS) forecasts for HEB, Affin Hwang Capital still believed that the group’s current FY18E Price earnings Ratio (PER) of 13-fold is still undemanding and reiterated its ‘buy’ call on the stock with a target price (TP) of RM0.78 per share.
Since GE14, HEB’s stock has seen a sharp share price correction from RM1.43 on May 8 to RM0.45 on May 31. The stock has recovered recently to RM0.65 to RM0.7 levels.
As at 4pm yesterday, HEB’s share price dipped to RM0.61 per share, down 6.87 per cent from its last adjusted closing price of RM0.65, with 10.573 million shares traded.
We believe it will be challenging for HEB to secure new contracts in FY18. We cut our FY18, 19, and 20E new contract assumptions to RM1, RM150, RM250 and million from RM94, RM200, and RM350 million previously. Affin Hwang Capital