Investment Highlights

• We maintain our HOLD call, forecasts and FV of RM2.71 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.

• According to a press statement issued by Finance Minister Lim Guan Eng, the Cabinet has accepted an offer by MMC Gamuda to reduce the cost of MRT2 underground work by RM3.6bil or 21.5% from RM16.71bil to RM13.11bil (vs. MMC Gamuda’s previous offer of a reduction of RM2.13bil or 12.7%). As such, the government has rescinded its previous decision to terminate MMC-Gamuda as contractor for the job.

• We are positive on the latest development by virtue of the believe that MMC-Gamuda has “made amends” with the government. Recall, we said that Corporate Malaysia 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.

• However, the reduction means MMC-Gamuda will have to carry out the 60% remaining work with an original contract value of RM9.6bil at RM6bil, representing a whopping 37.5% cut effectively.

• While the reduction includes the cancellation of two underground stations, i.e. Bandar Malaysia (North) and Bandar Malaysia (South), we doubt if MMC-Gamuda will be able to turn in any meaningful profits from the remaining work at this price. As such, we are keeping our forecasts that have removed profits from the remaining MRT2 underground work.

• 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 - 26 Oct 2018