Investment Highlights

• We fine-tune up our FY19-20F net profit forecasts by 2% and 3% respectively, raise our FV by 2% to RM3.41 (from RM3.34), and maintain our HOLD call. Our new FV is based on 13x revised CY19F FD EPS of 26.2 sen, in line with our benchmark forward target P/E of 11-13x for large-cap construction stocks. We project Gamuda’s earnings to fall by 20.5% to RM650.7mil in FY19F from RM818.4mil in FY18 largely due to the profits foregone from the disposal of Splash and the reduced contribution from the MRT2 we assume following the pending project review by the government.

• Gamuda's core FY18 net profit of RM818.4mil (excluding a RM300.1mil disposal loss from Splash and a RM4.4mil impairment loss on Gamuda Water) met consensus estimates but beat our forecast by 9%. The variance against our forecast came largely from the greater progress achieved at the MRT2 project.

• Its FY18 core net profit jumped 17% YoY driven largely by the construction division as work on the MRT 2 project gathered momentum (28% and 37% completion for the elevated and underground sections respectively as at end-Aug 2018), coupled with strong sales at overseas property projects. Gamuda recorded RM3.6bil property sales in FY18, exceeding slightly its target of RM3.5bil. Projects in Vietnam and Singapore continued to dominate, contributing about two-thirds of total sales, with local projects making up the balance. Gamuda has set a property sales target of RM4bil in FY19F, with local and overseas projects contributing RM2.3bil (56%) and RM1.7bil (44%) respectively. Gamuda is bullish on its new township projects in the Klang Valley, i.e. Gamuda Gardens (near Rawang), Gamuda Cove (near Nilai) and Twentyfive.7 (near Kota Kamuning).

• For the MRT2 project, Gamuda guided for the original RM32bil project size and scope being scaled down by about RM8bil, with the possibility of the project delivery partner (PDP) structure being converted to a fixed-priced turnkey contract. Despite the conversion, Gamuda believes that it could still maintain the effective margins by putting a markup that is equivalent to the original 6% PDP fee plus reimbursable expenses.

• We believe that even if Gamuda is able to maintain the effective margins, its absolute profits from the project will still decline by virtue of the 25% reduction in the project size from RM32bil to RM24bil. Our forecasts assume Gamuda’s absolute profits from the MRT2 project to contract by a third vs. under the original model and scope.

• Recall, Gamuda previous said that the government could reduce the cost of the MRT 2 project by: (1) shortening the overall alignment by cancelling the stretch in Putrajaya (that is projected to have low ridership anyway); and (2) doing away with the two underground stations in Bandar Malaysia (as the development of Bandar Malaysia, anchored by the KL-Singapore high-speed rail terminus, has now been put on hold).

• With regards to the RM32bil Penang Transport Master Plan (PTMP) project, Gamuda acknowledged that there is still no clarity as there are “too many moving parts and permutations”. To recap, mooted way before the 14th general election (GE14), the project was initially supposed to be “self-funded” via the rights to reclaim land in Penang Island, with no expectation of financial assistance whatsoever from the federal government.

• With the emergence of a federal government who is “friendly” to the Penang state government post-GE14, the Penang state government is now lobbying for federal funding that will help to fast track the project. On a brighter note, it was reported recently that the federal government has given its “approval in principle” for the LRT component of the project. To recap, Gamuda’s portion of the PTMP entails the construction in Penang Island an LRT line (RM8bil) and a new road network and other related infrastructure (RM8bil) and the reclamation of new landbank (RM16bil).

• We have not reflected any construction job wins over our forecast period for Gamuda. Our forecasts assume Gamuda’s construction profits to come solely from its construction order backlog of RM6bil at present (Exhibit 2).

• We remain cautious on the 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 nation-building, 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, is the uncertainty arising from the potential expropriation of Gamuda’s toll roads.

Source: AmInvest Research - 1 Oct 2018