KUALA LUMPUR, Feb 4 — CIMB Equities Research has made a stance of underweight on the construction sector after confusion over the East Coast Rail Line (ECRL) project.
Online portal The Star reported that CIMB Research said recent series of news reports on the ECRL has left more questions than answers as to the project’s status since a stop work order/project suspension was issued in July 2018.
It said 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 various news reports and channel checks point to two key takeaways — “First, 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 per cent 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 is significant even with the competitive 3.25 per cent 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.
However, if the project is terminated, the compensation to be paid to China Communications Construction Co (CCCC— the EPCC contractor), could be impactful.
“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 RM10.2 billion has been paid as advance payment to the CCCC (15.2 per cent of construction cost) and RM9.7billion for the actual progress payment as at July 2018.
