Investment Highlights

• We raise our FY19-21F forecasts by 1%, 2% and 2% and tweak our FV up by 1.4% to RM2.23 (from RM2.20) based on 10x revised CY19F FD EPS of 22.3 sen, in line with our benchmark forward target P/E of 10x for large-cap construction stocks. We maintain our UNDERWEIGHT call.

• Gamuda, via a 70:30 JV with a Taiwan private limited construction company called Dong-Pi Construction Co. Ltd, has been awarded by Taiwan’s state-owned oil & gas company CPC Corporation Taiwan, a NTD3.954bil (RM521.7mil) contract for the construction of a 1.23-km marine bridge connecting a receiving terminal to a manmade island.

• The latest contract, assuming a 70% share equivalent to RM365mil, has boosted Gamuda’s YTD (FY Jul) job wins to about RM1.3bil and its outstanding order book to RM10.9bil (Exhibit 2). To recap, Gamuda recently secured a number of smallish construction contracts worth a total of RM900mil locally, including a RM300mil building job under the Rumah Selangorku affordable housing scheme (leveraging on its capability in industrialised building system or IBS) and a RM300mil infrastructure work package for KL118. We are now reflecting these RM1.3bil new jobs in our forecasts.

• We are positive on the latest development. While the impact to earnings is insignificant, we believe venturing to overseas construction markets is a step in the right direction given the potential prolonged downturn in the local construction market as the government tightens its belt. In addition, Taiwan is no new market to Gamuda. It was involved in the civil works for the massive Kaohsiung MRT project including 8km of tunnels back in 2002.

• Separately, Gamuda revealed that its 1HFY19 results announced two days ago had included a one-off RM37mil arbitration gain from India. As such, its adjusted 1HFY19 net profit of RM308.2mil actually came in at only 57% and 49% of our full-year forecast and the full-year consensus estimates (as compared with 64% and 55% we reported previously). This meant the results actually missed market expectations by a wider margin while still coming in within our forecast (as we expect a weaker 2HFY19 with a downsized MRT2 project). Also, it meant its 1HFY19 core net profit actually dropped by 28% (not a decline of 19% we reported previously) (Exhibit 1).

• We maintain our view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by: (1) A major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence; and (2) The permanent reduction in overall margins for players in the absence of high-margin directly-negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement. Similarly, we are cautious on Gamuda’s property development business due to an expected prolonged downturn in the local property market.

• Also, with reduced recurring toll road earnings (that make up about 35-40% of Gamuda’s total earnings) post the disposal of Gamuda’s stable of toll road concessions, the defensiveness of Gamuda’s earnings will be eroded, resulting in a higher risk premium. Even if Gamuda is to be able to strike a good deal with the government and raise substantial proceeds from the disposal, it will take time for it to identify new businesses to fill up the vacuum.

Source: AmInvest Research - 29 Mar 2019