Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM3.34 based on 13x CY19F FD EPS of 25.7 sen, in line with our benchmark forward target P/E of 11-13x for large-cap construction stocks.

• A JV between Gamuda and Singapore-based Evia Real Estate Pte Ltd has emerged the highest bidder at S$318.9mil (RM963mil) for a 51,412 square metre land parcel earmarked for the development of an executive condominium comprising 550 units along Anchorvale Crescent in Singapore. The JV beat the second highest bidder for the Housing and Development Board of Singapore (HDB) land literally by a whisker, only S$899.00 (RM2,700) (Exhibit 1).

• We gathered that the site is located in a popular area with young families within proximity to Cheng Lim LRT station, Sengkang MRT station, Sengkang General Hospital, Sengkang Community Club and Compass One Mall (Exhibit 2).

• At S$6,203 per square metre (psm), the winning bid is comparable to the winning bid of S$6,273 psm for another executive condominium site – at Sumang Walk, about 2.3km from Anchorvale Crescent - tendered out by HDB in Mar 2018.

• News reports suggest that the demand for executive condominium projects in Singapore has been good at present largely due to limited new supply in the market. The case in point is a take-up rate of 93% (as at end-June 2018) for the 628-unit Rivercove Residences launched by Hoi Hup and Sunway Developments in Anchorvale Lane this year. The project offers 3-, 4- and 5-bedroom units at S$830,000- 1.13mil, S$1.1mil-1.3mil and S$1.34mil-1.47mil respectively.

• We are positive on the latest development as the new land will help to sustain Gamuda’s property earnings from Singapore over the medium term. For FY18F, Gamuda projects RM330mil sales from its 50%-owned project called GEM Residences in Singapore, which is equivalent to 9% of its projected total sales for the group of RM3.5bil in FY18F. Gamuda has yet to finalise the potential GDV from the land.

• Assuming a 50% share, the land will increase Gamuda’s net debt and gearing of RM3.3bil and 0.42x as at end-Apr 2018 (adjusted for RM1bil proceeds from the sale of its 40% stake in Splash) to RM3.8bil and 0.48x which are still manageable.

• Nonetheless, we remain neutral on Gamuda on the cautious outlook for the local construction sector as the government cuts back on public infrastructure projects on grounds of fiscal prudence. While the rollout of public infrastructure projects will resume over the medium term as infrastructure development remains key to nationbuilding, we believe the focus will shift to smaller scale/value-for-money basic infrastructure projects such as road upgrading, bridges, schools, drainage, rural water and electricity supply and smallish sewerage schemes, from multi-billion mega projects. The smaller projects are less economical to large-contractors such as Gamuda, given their high fixed overheads.

• Not helping either, are the prolonged downturn in the local property market that weighs down on Gamuda’s property division, and the uncertainty arising from the potential expropriation of Gamuda’s toll roads.

Source: AmInvest Research - 19 Sept 2018