Penang LRT a sector catalyst

Published by TheStar • 9/5/2023

PETALING JAYA: It is the belief among certain circles in the local construction industry that it still needs a number of mega-projects – aside from the Mass Rapid Transit 3 – to give it a more meaningful post-lockdown era jumpstart.

As such, industry observers have welcomed the news that the federal government has decided to allocate funds to expedite Penang’s Bayan Lepas light rail transit (LRT) project, an assignment that has long been put on the back burner due to funding issues.

Prime Minister Datuk Seri Anwar Ibrahim over the weekend pledged federal funds for the immediate implementation of the LRT project, and will meet up with the island’s state government to iron out a number of major details, particularly pertaining to loans that may require the federal government’s involvement.

The proposed Bayan Lepas line will measure 26.8 kms, serving some 23 stations on the eastern side of Penang island from Komtar in Georgetown to Bayan Lepas, costing RM9.5bil and would have been funded by proceeds from the Penang South Islands (PSI) reclamation project before Anwar’s announcement.

An artist’s impression of the Bayan Lepas LRT.

MIDF Research, in a note released yesterday, put forth a number of issues that would need better clarification when the Prime Minister sits down with the Penang administration, estimated to take place within the next two weeks.

Among some questions raised were whether the federal government is funding the entire LRT project, including the five other lines proposed under the Penang Transport Master Plan (PTMP); or if the assignment would remain a federal or state project, as well as how would the implementation of the Penang LRT affect the proposed PSI project.

“If the project goes to the federal government’s administration, will it then re-evaluate the project in terms of the cost, alignment and stations?” asked the research outfit.

At the same time, KAF Research senior analyst Mak Hoy Ken told StarBiz that while the imminent LRT rollout in Penang was positive, he thinks it would be at least after the conclusion of the six state elections in Selangor, Negri Sembilan, Kelantan, Terengganu, Kedah and Penang itself before the floodgates open as far as job flows are concerned.

“We do note, however, that tender flows are starting to pick up in Sabah and Sarawak, such as for the Kuching Autonomous Rapid Transit, the new phases of the Pan Borneo Sarawak Highway, the Sabah-Sarawak Link Road and border infrastructure with (future Indonesian capital) Nusantara,” he said.

Refocusing on the Penang LRT, Mak said the Penang state government is also slated to meet with the project delivery partner (PDP) SRS Consortium, a joint venture owned 60% by construction titan Gamuda Bhd, with the remainder split equally between Loh Phoy Yen Holdings Sdn Bhd and Ideal Property Development Sdn Bhd.

As Gamuda has a hand in both the LRT and PSI projects, Mak explained that reclaimed land sales from the PSI had long been earmarked as the main funding vehicle for not just the Bayan Lepas LRT, but other components of the larger PTMP.

“Based on its current iteration, the PSI would provide immediate job accretion of RM5bil to Gamuda via Phase 1 of Island A’s reclamation works of approximately 1,200 acres; with peak capital expenditure commitment of RM4bil during year four,” he said.

He opined that the latest development may actually be positive for Gamuda despite the planned scale-back of the PSI project, as a lower scope for the PSI and fast-tracked, federal-funded LRT project could actually decrease upfront capital requirements – and by extension, the associated funding risk for Gamuda with the PSI.

He added that the much-needed federal funds would also enable the group to restrategise its pricing approach for future land sales at the three man-made reclaimed islands, and a stretched timeline for the PSI was still in line with the existing turnkey role for SRS Consortium, as there is no specific time-frame for them to complete its reclamation works.

“Rather, it could free up more funds to accelerate other components of the PTMP.

“Assuming status quo, our back-of-the-envelope calculations reveal that Gamuda could rake in annual profits of RM51mil from construction work alone, equivalent to around 6% of group core profit for the financial year ended July 31, 2022. This assumes a pre-tax profit of 8%,” Mak revealed.

Nomura Research analyst Tushar Mohata, meanwhile, is optimistic that the intervention from the federal government for the LRT project is definitely a plus point for the construction industry as a whole, as well as for Penang’s infrastructure development.

He told StarBiz that one of the primary reasons the project had been put on hold was funding issues, and details such as timelines and exact amount of funding notwithstanding, the assignment will benefit any contractors and sub-contractors involved.

Echoing the view of Mak regarding the funding of the LRT project and how it would affect Gamuda as one of the main players, he said the risk to the PDP, had the government not decided to step in, would be in monetising the reclaimed land.

“So, while this new development could lead to a lower order book in terms of reclamation value, it would also mean lower funding requirements for Gamuda and reduced balance sheet drag.

“Direct funding for the project would mean payments are much more likely to be on time. Otherwise, there would be more uncertain variables added to the equation if the PDP has to depend on land sales, or how soon would these parcels be sold,” he said.

On the other hand, Mohata emphasised that any further projections about the profitability or feasibility of the project would depend on details that the federal administration was looking to finalise soon with the Penang state government.