KUALA LUMPUR:  CIMB Equities Research is underweight on the construction sector following certainties over the East Coast Rail Line (ECRL).

It said on Monday it would be cautiously positive on the impact on local contractors if the ECRL is allowed to proceed this year.

 

“We believe opportunities for local contractors could still be limited if the funding from Exim Bank and EPCC structure is unchanged, more so if the overall project is downsized significantly. Maintain sector Underweight,” it said.

CIMB Research said recent series of news reports on the ECRL has left us with more questions than answers as to the project’s status since a stop work order/project suspension was issued in July 2018.

Its observations from various news reports and channel checks still point to two key takeaways.

Firstly, negotiations on whether to terminate/cancel, proceed on the existing scope or on a smaller-scale version of the ECRL project have been challenging, given the bilateral issues involved, and the fact that the project was suspended at 14% completion.

Secondly, while the government has on numerous occasions broadly indicated its intention to discontinue the ECRL project, financial implications continue to be the main hurdle. 

“If the project is allowed to proceed without downsizing, the interest portion on the updated RM66.8bil construction cost as derived by the Ministry of Finance (MOF) is significant even with the competitive 3.25% interest rate on the loan from Exim Bank of China (with an additional seven-year repayment moratorium based on the original 20-year loan agreement),” it said.

CIMB Research said on the other extreme, if the project is terminated, the immediate financial impact on the Malaysian government is the compensation to be paid to China Communications Construction Co. (the EPCC contractor), which would typically be dictated by the termination clause of the EPCC contract.

In terms of what has been paid, the MOF indicated previously that RM20bil has been drawn down from Exim Bank (as at April 2018) of which RM10.2bn has been paid as advance payment to CCCC (15.2% of construction cost) and RM9.7bn for the actual progress payment as at July 2018. 

It also indicated that CCCC has committed a redeemable performance bond amounting to RM10.2bil.

“At this juncture, what has been reported in the press but remains unconfirmed/unverified by the government (pending an official announcement), is 1) whether the EPCC contract with CCCC has been terminated, and 2) if the government is indeed considering a new contractor, should it decide to proceed with the project at a significantly lower price tag of under RM40bil, as reported by The Edge Markets,” it said.

Prime Minister Tun Dr Mahathir Mohamad was quoted in the press as saying that negotiations for an amicable solution regarding the ECRL have been tough, with one of the options being a possibility that the overall scope of the ECRL project will be downsized.

“Hypothetically, and assuming that the negotiating parties deem that the cost of terminating ECRL exceeds its benefits, a potential downsizing may involve focusing on phase one of the ECRL, in our view. 

“Based on MOF’s cost breakdown, this is the RM46bil package serving the east coast of Peninsula excluding phase two, double tracking line and extension to Pengkalan Kubor worth a combined RM21bil,” said CIMB Research.