Light at the end of the tunnel for MRT2
Solutions in sight in the MMC-Gamuda versus MoF impasse
IT increasingly appears that the Ministry of Finance (MoF) and the MMC-Gamuda joint venture will arrive at a compromise for the underground works of the Mass Rapid Transit Line 2 (MRT2).
The latter which had its underground contract of the MRT2 revoked earlier in the week by the MoF saw its shares crumble. However, the government’s decision to set up a committee to review the project’s costing, design and details had revived hopes that both parties would soon arrive at a compromise.
Consultants say that the gap between the cuts expected in the MRT2 underground portion price tag from the government and what has been offered by the MMC-Gamuda JV so far is about RM2.5bil.
Tony Pua the MP for Damansara and political secretary to Finance Minister Lim Guan Eng cited an independent engineering consultant’s study stating that MRT Corp should expect total savings of between RM4.19bil and RM5.79bil for the estimated 60% portion of the underground unfinished works.
However, MMC-Gamuda had only offered to reduce the contract value by RM2.13bil or 12.7% to RM14.58bil.
Based on the numbers, the gap is as high as RM3.66 bil or as low as RM2bil.
Market observers say that while the figures being talked about are not a small amount but if expectations can be managed then it could become a reality that the JV company may soon be able to resume work on the underground tunnel for the MRT2.
“There is a resolve to settle the negotiations amicably,” say sources.
Sources say there are other factors to consider when carrying out a re-tendering exercise which may also entail additional hidden costs and resources.
“Also the resources to dig the tunnels and so forth have all been deployed at their various locations and a re-tendering process will take extra time and move the scheduled completion to a later date. It would take at least 18 to 20 months more,” a source says.
At one stage, the situation appeared helpless for the MMC-Gamuda JV after the MoF announced the termination for the underground works last Sunday.
On Tuesday, Prime Minister Tun Dr Mahathir Mohamad said the termination would be reviewed.
A consultant says that the developments in the last one week should have knocked more sense on both sides that the best way out is to settle it through negotiations and a positive outcome is likely.
“Nobody thought that the MoF would dare terminate works, especially underground tunnel jobs when it was 40% done. But it did.
“As for Gamuda, previously it kept its books closed. Now it has said that it would open its books to substantiate why the cost cannot come down much unless the scope of work is reduced,” says the consultant.
“The intention of the MoF is consistent in the bigger scheme of things to reduce the cost of projects,” says an observer.
“But one also has to consider the sancity of contracts that have been signed by the government and its impact on other contracts,” the observer adds.
Gamuda and MMC Corp equally owns the JV company (50:50) MMC-Gamuda KVMRT (T) Sdn Bhd which is carrying out the construction works of the MRT2.
MMC is largely controlled by Seaport Terminal (Johore) Sdn Bhd.
As for Gamuda, the largest shareholder is Raja Eleena Sultan Azlan Shah who has a 4.82% stake through Generasi Setia Sdn Bhd, based on the company’s 2017 annual report.
The second largest individual shareholder in Gamuda is its managing director Datuk Lin Yun Ling who owns 3% stake in the company.
Other shareholders in both MMC and Gamuda are the investing public owning the company through the EPF, insurance schemes and trust funds.
In a week full of ups and downs in the share prices of both construction firms, the conciliatory tone struck by the MMCGamuda JV had raised hopes of the investing public of an eventual deal and this had seen a partial recovery in both company’s share price.
AmBank Research had, in its report on Tuesday, upgraded Gamuda to a “hold” from “underweight” and had maintained its forecasts and fair value of the stock at RM2.71 per share.
“Our fair value is based on a 12 times forecast 2019 fully diluted earnings per share of 22.6 sen, in line with our benchmark forward target price to earnings ratio of 11-13 times for large-cap construction stocks,” the research house says in its report.
The upgrade in recommendation is based on the plunge in Gamuda’s share price which had already very much priced in all the negatives from the government’s decision to terminate the MMC-Gamuda JV as MRT2’s tunnelling contractor, it says.
AmBank Research also adds that it is also encouraged by the highly conciliatory tone by the JV’s press statement a day after the termination was announced.
“We believe this may pave the way for an amicable solution out of this impasse,” it adds.