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 1).

• Gamuda, via a 70:30 JV with local partner Dong-Pi Construction Co Ltd, has secured a NT$6.8bil (RM932.5mil) contract from Port of Keelung, Taiwan International Ports Corporation Ltd, for the construction of a 4km seawall and related works. The contract period is five years commencing January 2020.

• We are only mildly positive on the latest development. Based on an effective share of 70% translating to RM653mil over five years at a guided PBT margin of 5%, we estimate that the contract will only boost Gamuda’s earnings by about RM5mil annually or 1.0–1.2% of our current FY21–22F forecasts.

• Also, to put things in perspective, the latest contract is insignificant vs. Gamuda’s construction churn rate of about RM1bil per quarter currently.

• 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 a high “concentration risk” in the Penang Transport Master Plan (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 - 3 Jan 2020