Investment Highlights

• We upgrade our call to HOLD from UNDERWEIGHT as valuations have become more reasonable after the recent correction in Gamuda’s share price. We raise our FY20– 22F net profit forecasts by 15%, 31% and 37% respectively, but maintain our FV of RM2.84 based on “sum of parts” (SOP) (Exhibit 1), valuing its construction business at 10x forward earnings, in line with our benchmark forward target P/E of 10x for large-cap construction stocks. A dividend yield of 4.5% p.a. should provide a good support to share price at the current level.

• The earnings upgrade is to reflect our new assumption that the RM2.36bil toll concession disposal deal will not take place anytime soon (we previously assumed that it would happen in early 2020), following the change in the political landscape recently. This means Gamuda will now continue to recognise these recurring toll road incomes during our forecast period.

• Meanwhile, we expect Gamuda’s 1HFY20F results, due out next week, to come in at RM340–350mil at the net level (relatively flat YoY vs. a RM345.2mil net profit registered in 1HFY19). This would be broadly in line with expectations at 56% and 51% of our revised full-year forecast and the full-year consensus estimates respectively.

• MMC Corp (Gamuda’s JV partner in the MRT2 project) made the following observations in its 4QFY19 (Oct–Dec 2019) results announced recently, i.e. “lower work progress from KVMRT-SSP Line (MRT2)… offset by a reversal of provision no longer required at the double track project (Ipoh–Padang Besar electrified doubletracking project)”.

• Taking the cue from these, we expect Gamuda in 2QFY20 (Nov 2019–Jan 2020) to recognise less profits from the MRT2 project (its key active project at present), but cushioned by a writeback (we believe, relating to expired defect liability) from the Ipoh–Padang Besar electrified double-tracking project we estimate at RM60–70mil. To recap, MMC Corp was also Gamuda’s JV partner in the RM12.5bil Ipoh–Padang Besar electrified double-tracking project with a construction period spanning from 2008 through 2014.
• We believe the recent change in the political landscape has not altered the subdued outlook for the local construction sector. Given the still elevated national debt, coupled with the recent collapse of oil prices that will hurt petroleum revenues, 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, such as MRT3 and the KL–Singapore high-speed rail.
• Zooming in on Gamuda, we believe the Penang Transport Master Plan (PTMP) project is now unlikely to kick-start in 2H2020 as guided given the change in the political landscape. It is still unknown as this point the new government’s stance on the project. 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 - 19 Mar 2020