Investment Highlights

• We cut our FY20F net profit forecast by 7% and trim our FV by 2% to RM2.78 (from RM2.84) based on “sum of parts” (SOP), valuing its construction business at 10x revised forward earnings, in line with our benchmark forward target P/E of 10x for large-cap construction stocks (Exhibit 2). Maintain HOLD.

• Gamuda's 1HFY20 results came in at 57% and 51% of our full-year forecast and the full-year consensus estimates. However, we consider the results below expectations as we expect a weak 3Q (Feb–Apr 2020) on the back of the 28- day movement control order (MCO) measure by the government (to curb the spread of the Covid-19 pandemic) which will hurt Gamuda’s construction (except tunnelling which is considered to be “critical infrastructure”), property and toll road operations. Our earnings downgrade is to reflect this.

• Its 1HFY20 core net profit only grew 1% YoY as a better showing from property (strong sales and firm margins in Vietnam) was offset by a weaker performance from construction (downsized MRT2 contract) and concessions (absence of contribution from Splash post-disposal).

• Gamuda recorded only RM1bil property sales in 1HFY20, with overseas projects (largely in Vietnam) contributing about two-thirds of the total, while the balance was 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 downward revision, largely due to the soft local property market. It hinted at a slightly better 2H with maiden sales from its 50%-owned RM2bil OLA executive condominium project in Singapore.

• Key highlights from the briefing yesterday are:

1. Gamuda seems to be pitching to the government the idea to earmark the RM21bil MRT3 as one of the “anchor” shovel-ready infrastructure projects to pump-prime the economy amidst an expected slowdown in the economy due to the Covid-19 pandemic. Gamuda is confident to hit the ground running in about three months if the project is to be awarded to it directly (vs. 12–18 months if the project is to be awarded via an international tender). Having said this, Gamuda is mindful of the government’s fiscal constraints amidst sharply lower petroleum revenues following the recent collapse in oil prices.

2. For the Penang Transport Master Plan (PTMP) project, Gamuda remains optimistic that physical work will start in 2H2020, at least for the Penang South Reclamation (PSR) component (i.e. the reclamation of three man-made islands with a total area of 4,200 acres at the southern tip of Penang Island). It said that the Penang state government is considering two funding options, namely: (1) commercial loans from local banks; and (2) a contractor financing/deferred payment scheme. Under the latter, the appointed contractor is required to come out with RM2.5–3.0bil to fund the reclamation of the 790-acre Smart Industrial Park on the 2,300-acre Island A. Once completed, the state government will sell the industrial park. The cash flow and profit raised from the sale of the industrial park will be used to pay the contractor as well ploughed back to fund further reclamation works under the PSR project, as well as the LRT and Pan Island Link highway under the PTMP project. Meanwhile, with Penang returning to be an opposition state following the recent change in the political landscape, Gamuda (and it believes the state government as well) is unsure if the previously announced federal government’s guarantee for Penang state’s “LRT bonds” will still be good. As such, there is no clarity if the project will get off the ground anytime soon.

3. Similarly, following the change in the political landscape, there is now no visibility with regards to the proposed disposal of Gamuda’s equity in various toll roads to the government for RM2.36bil. Gamuda is “waiting to engage with the new finance minister” with regards to the deal. 4. Gamuda’s ambition to fast track its entry into the Australian construction market seems to have been thwarted. It has walked away from the deal to acquire a 50% stake in a smallish family-owned Australian construction company called Martinus Rail. It revealed that the stumbling block had been the vendor’s unwillingness to “share/relinquish the control of the company”. Nonetheless, it will continue to build its presence in the market via wholly-owned Gamuda Australia. It acknowledged that it is more difficult to penetrate the market by entering as a foreign company.

• 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 the MRT3 and the KL–Singapore high-speed rail.

• Zooming in on Gamuda, we believe the Penang Transport Master Plan 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.

• However, we now see value in Gamuda after the steep correction in its share price in recent months. We believe Gamuda’s current share price will be very well supported by a dividend yield of 4–5% p.a., underpinned by recurring incomes from its toll roads.

Source: AmInvest Research - 26 Mar 2020