Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM2.20 based on 10x CY19F FD EPS of 22.0 sen, in line with our benchmark forward target P/E of 10x for large-cap construction stocks.

• Gamuda's 1QFY19 net profit came in at 32% and 27% of our full-year forecast and the full-year consensus estimates respectively. We consider the results within our forecast but below market expectations as we expect weaker quarters ahead with the downsized MRT2 project.

• Its 1QFY19 net profit declined 16% YoY due to weaker performance from all divisions, i.e. construction (weaker margins despite 1QFY19 numbers having yet to reflect the negative impact from the downsized MRT2 contract), property (lower sales) and concessions (absence of contribution from Splash after its disposal).

• Gamuda reiterated its guidance for a PBT margin of 5-6% for its RM10.2bil outstanding works on the MRT2. Our forecasts assume a more conservattive PBT margin of 4%, premised upon the fact that MMC-Gamuda is now directly exposed to the risk of cost overrun under the current fixed price contract basis (vs. “within budget” being just a KPI that could subject MMC-Gamuda to penalties under the previous project delivery partner model). At present, the elevated and underground portions of the project are 27% and 41% completed respectively.

• Gamuda disclosed that it recently secured a number of smallish construction contracts worth a total of RM900mil, including a RM300mil building job under the Rumah Selangorku affordable housing scheme (leveraging its capability in industrialised building system or IBS) and a RM300mil infrastructure work package for KL118. We estimate that these contracts will boost Gamuda’s FY19-21F earnings by 1-2% which is immaterial (and hence we are keeping our forecasts). More importantly, this shows that Gamuda is willing and able to “down trade” in difficult times. At present, Gamuda’s outstanding construction order book stands at RM11.8bil (Exhibit 2).

• In addition, Gamuda is exploring overseas markets including Singapore (where it has submitted a few unsuccessful bids for the MRT and highway projects, but “is learning to get the prices right”), Vietnam (public transport systems), Australia (expansion of metro lines in Melbourne and Sydney) and Taiwan (by virtue of Gamuda’s previous involvement in the construction of the Kaohsiung MRT).
• Gamuda recorded only RM600mil property sales in 1QFY19, with overseas projects (largely in Vietnam) contributing about 60%, while local projects the balance 40%. Nonetheless, Gamuda remains confident that it will meet its FY19F property sales target of RM4bil, with local and overseas projects contributing RM2.3bil (56%) and RM1.7bil (44%) respectively. Gamuda is bullish on Vietnam as well as its new township projects in the Klang Valley, i.e. Gamuda Gardens (near Rawang), Gamuda Cove (near Nilai) and Twentyfive.7 (near Kota Kamuning). At present, Gamuda’s unbilled sales stand at RM2.3bil.

• We get an impression that the RM32bil Penang Transport Master Plan (PTMP) project, where Gamuda has been appointed the project delivery partner, still remains fluid for now. Gamuda said that the Penang state government now plans to monetise its land and use the proceeds to fund the project (instead of funding the project via payment in kind in the form of land and rights to reclaim land previously). To recap, Gamuda’s portion of the PTMP entails the construction of the George Town – Bayan Lepas LRT line (RM8bil), the Pan Island Link 1 (PIL1) highway (RM8bil) and a new reclamation project known as Penang South Reclamation (RM16bil).

• 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 - 17 Dec 2018