Investment Highlights

• We cut our FY19-21F net profit forecasts by 4%, 9% and 13% respectively, reduce our FV by 21% to RM2.20 (from RM2.80) and downgrade our call to UNDERWEIGHT from HOLD. Our new FV is based on 10x revised CY19F FD EPS of 22.0 sen. The reduction in the forward P/E multiple from 12x previously is to reflect the continuing de-rating of construction stocks. Meanwhile, the earnings downgrade is largely to factor in weaker property profits as we expect Gamuda to command weaker selling prices and hence margins for its local property launches over the short term.

• We share Gamuda’s optimism about its new township projects in the Klang Valley, i.e. Gamuda Gardens (near Rawang), Gamuda Cove (near Nilai) and Twentyfive.7 (near Kota Kemuning), which are strategically located, well planned and effectively marketed. Gamuda projects combined sales from the three township projects to almost quadruple to RM1.15bil in FY19F from a mere RM300mil in FY18 (Exhibit 1). However, we believe Gamuda will have to “go with the flow” by offering discounts to buyers in line with the commitment made by the Real Estate & Housing Developer’ Association Malaysia (REHDA) to the government in the recently announced Budget 2019 to cut prices for new launches and unsold stocks by 10%. We believe the reason is Gamuda will price itself out of the market if it holds the prices while its competitors reduce them.

• Gamuda’s property division’s performance has been relatively “defensive” given its geographical diversification. In FY18, the division recorded RM3.6bil sales with about two-thirds coming from overseas (largely Vietnam and Singapore) and the balance from local projects. However, for FY19-20F, Gamuda expects local projects to make a significant comeback, driven largely by the three new township projects as mentioned. It has set property sales targets of RM4bil and RM4.5bil in FY19F and FY20F respectively, with local projects contributing 54-58% with overseas ventures making up the balance 42-46% (also see Exhibit 1).

• Following the slash in Gamuda’s construction profits on the revised contract terms for the MRT2 project, our forecasts see property profits making up 28-36% of group earnings in FY19-20F vs. 24% in FY18. Given the significance of property profits to group earnings, we believe the latest development in the local property sector warrants a revision to Gamuda’s earnings forecasts. With the latest revisions, we now project property profits to make up only 26-30% of group earnings in FY19-20F.
• 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 - 16 Nov 2018