Investment Highlights

• We maintain our forecasts and FV of RM2.71 but upgrade our call to HOLD from UNDERWEIGHT. Our FV is based on 12x CY19F FD EPS of 22.6 sen, in line with our benchmark forward target P/E of 11-13x for large-cap construction stocks.

• Our recommendation upgrade is premised upon: (1) a steep 24% plunge in Gamuda’s share price yesterday which we believe has very much reflected the negative news of the government’s decision to terminate MMC-Gamuda as the tunnelling contractor for the MRT2 project; and (2) MMCGamuda’s highly conciliatory tone in a statement released to the media after market close yesterday, which we believe may pave the way for an amicable solution to the impasse.

• MMC-Gamuda said in the media statement that “MMCGamuda remains open to further discussion with the MOF (the Ministry of Finance) and is amenable to cooperate with the MOF in reaching an agreeable reduction”.

• MMC-Gamuda revealed that it had offered the MOF a 24% reduction (RM2.3bil) for the balance 60% of the underground works amounting to RM9.6bil. The reduction was to be achieved by reducing the number of the underground stations from 10 to six, reducing station entrances and lowering specifications for finishes of the stations.

• MMC-Gamuda also said that “even though the MOF has made known that the offered reduction of RM2.3bil is still not adequate, to date it has not been conveyed to MMC-Gamuda an acceptable target figure that the MOF has in mind”. MMCGamuda appears ready to make a deal with the MOF by announcing that “our perception of the latest cost gap is that it is an amount which is not unbridgeable”. The ball is now in the government’s court.

• We believe Corporate Malaysia, Gamuda included, have increasingly had to learn that apart from maximising profits for their shareholders, it is equally important to maintain a cordial working relationship with the government, as well as to deliver goods and services to the rakyat in the best possible value-for-money way.

Source: AmInvest Research - 9 Oct 2018