Analysts lukewarm over ECRL realignment prospects

PETALING JAYA: The proposal to revert to the East Coast Rail Link (ECRL) to its original alignment as reported in the media is estimated to increase the RM44 billion cost by 11%-46%, according to CGS CIMB.

“We are neutral to negative on this news as we feel that the additional construction cost will mainly benefit the turnkey contractor China Communications Construction Co (CCCC), which is undertaking the majority of the tunneling works,” it said in a report.

The research house pointed out that the realignment proposal involving mainly Section C, the portion traversing Klang Valley from the East Coast leading to Port Klang in the West Coast, will require approval from the Cabinet.

“Given that the railway scheme for all three sections of the ECRL was approved in 2019 and overall project progress is at 16%, this development is therefore a surprise to us,” it said.

The news report, which quoted sources, stated that prior to the 2019 project revision and cost rationalisation, the original alignment cost an additional RM20 billion, as it involves more tunneling works as it will reinstate the foregone tunneling scopes from Genting Sempah in Bentong, Pahang to Selangor.

This portion of tunneling works could cost at least an additional RM8 billion.

On the other hand, CGS-CIMB remains optimistic on the outlook for the KLSingapore high speed rail (HSR) in 2H20F.

“The shortage of new infra projects supports our view that the HSR could be included in the 12th Malaysia Plan (12MP),” it explained.

On the whole, the research house retains its neutral call on the sector and continues to prefer YTL Corp Bhd and Malaysian Resources Corp Bhd (MRCB), given their track records of securing sizeable HSR scopes in 2018.

On a broader note, Affin Hwang Capital revealed that the construction stocks under its coverage has reported earnings that were below market and its expectations.

It stated aggregate net profit for the sector contracted 41% year-on-year (yoy), mainly due to slow progress billings and exceptional losses, but grew 4% on a quarterly basis for 1Q’20.

The research house reported out of the 10 construction companies that it covers, 60% were below expectations, 10% within its expectations and 30% above its expectations.

It elaborated that domestic operations for most construction companies were weaker due to the MCO and slow public-sector project awards in 2019.

“Furthermore, the progress billings for construction and property projects had been adversely affected by the closure of construction sites since the MCO started on March 18.”

It opined that the full impact of the MCO will likely be felt in 2Q’20 as construction sites were only allowed to restart work in early May, which is further complicated by Covid19 testing requirements for foreign workers and supply chain disruptions.

With that, Affin Hwang expects most construction companies to report weaker results in 2Q20.