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 large-cap construction stocks (Exhibit 2).

• Gamuda's 1QFY20 results came in at 32% and 26% of our full-year forecast and the full-year consensus estimates. However, we consider the results within expectations as we expect a weaker 2H in the absence of toll road profits assuming the disposal is to be completed by then.

• Its 1QFY20 core net profit only grew 1% YoY as better showing from property (strong sales and firm margins in Vietnam), was offset by weaker performance from construction (the downsized MRT2 contract) and concessions (the absence of contribution from Splash following its disposal).

• Gamuda recorded only RM0.5bil property sales in 1QFY20, with overseas projects (largely in Vietnam) contributing about 60% of the total with the balance coming from its local township projects comprising largely Gamuda Gardens (near Rawang), Gamuda Cove (near Nilai) and Twentyfive.7 (near Kota Kamuning). It is reviewing its FY20F property sales target of RM4bil for a possible downward revision, largely due to the soft local property market.

• Key highlights from the briefing last Friday are:
  
  1. Gamuda is hopeful that the “definitive agreements” pertaining to the disposal of its equity in various toll roads to the government for RM2.36bil will be signed in January 2020, paving the way for EGMs in March 2020 and completion of the deal in April/May 2020. This is conditional upon the deal being consistent with the government’s policy framework with regards to the toll road ownership in Malaysia. The government is at present still trying to decide if it should own toll roads. If the government decides to sell the North-South Expressway (partly owned by Khazanah) to the private sector, it then does not make sense for the government to take over Gamuda toll roads.
  
  2. For the Penang Transport Master Plan (PTMP) project, Gamuda reiterated its guidance for physical work to start in 2H 2020. It is working on the basis that the Penang state government has secured federal government guarantee to issue “LRT bonds” (a statement made by Penang Chief Minister Chow Kon Yeow recently). Gamuda also reiterated that it is providing “assistance” to the Penang state government to secure funding for the Penang South Reclamation (PSR) project (the reclamation of three man-made islands with a total area of 4,200 acres at the southern tip of Penang Island). For a start, about RM3.5–4.0bil funding is required to finance the reclamation of the 790-acre Smart Industrial Park on the 2,300-acre Island A. Once completed, the industrial park will be sold and the cash flow and profit will be ploughed back to fund the LRT, Pan Island Link highway and further reclamation works under the PSR project.
  
  3. Gamuda, via a 45%-owned entity, has won an open tender from the Land Transport Authority of Singapore for the construction of a bus depot worth S$260mil (RM780mil) in Singapore. While Gamuda’s share of works is worth about RM400mil, we understand that the expected profits are marginal given the highly competitive nature of public works in Singapore.
   
• We remain cautious on the outlook for the local construction sector. Given the still elevated national debt, we believe the government has very limited room for fiscal manoeuvre which means that it is unlikely to roll out new public infrastructure projects in a major way over the short term, including the MRT3 project.
   
• Zooming in on Gamuda, we sense high “concentration risk” in the PTMP project in the event the project fails to get off the ground timely (2H 2020 as guided) or Gamuda being given a reduced role in the project (as the project delivery partner (PDP) model is no longer favoured by the federal government as manifested in the cancellation of the PDP model in the construction of the LRT3, MRT2 and Pan Borneo Highway Sarawak). We are also mindful of the potential hefty initial “school fees” Gamuda may have to pay in order to gain a foothold in the Australian construction market.

Source: AmInvest Research - 16 Dec 2019