Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM2.84 based on “sum of parts” (SOP), valuing its construction business at 10x forward earnings, in line with our benchmark forward target P/E of 10x for largecap construction stocks (Exhibit 1).

• During the announcement of Budget 2020 last Friday, Finance Minister Lim Guan Eng in his budget speech said that “the Cabinet has approved the proposed offer to acquire four Klang Valley highways – Shah Alam Expressway (KESAS), Damansara-Puchong Expressway (LDP), Sprint Expressway (SPRINT) and SMART Tunnel (SMART) – to be funded via government-guaranteed borrowings”.

• This is in line with our expectations. Our forecasts already assume the sale of these Gamuda’s toll road assets to the government to be completed in Jan 2020, and hence Gamuda only recognises 6-month contributions from the highways in FY20F, and none from FY21F onwards. Our SOP valuation for Gamuda has also reflected the RM2.36bil proceeds Gamuda is to receive from the disposal.

• To recap, while we believe Gamuda is getting a fair deal with regards to the disposal (DCF valuation at a discount rate of about 6% based on our estimates), we are mindful of the change in Gamuda’s earnings profile after the disposal. With reduced recurring toll road earnings (that make up about 35–40% of Gamuda’s total earnings), the defensiveness of Gamuda’s earnings will be eroded, resulting in a higher risk premium.

• Gamuda is searching for new businesses with recurring incomes to fill the vacuum. It believes the RM46bil Penang Transport Master Plan (PTMP) is a good fit as it could potentially generate recurring project delivery partner (PDP) fee for more than a decade.

• The not-so-good news is that the PTMP project was not mentioned at all in the budget speech (which means the chances of it getting financial assistance from the federal government are slim), so was the MRT3 project (that should sustain Gamuda’s construction earnings after the completion of MRT2 in 2022).

Source: AmInvest Research - 14 Oct 2019