Investment Highlights

• We downgrade our call to UNDERWEIGHT from HOLD as valuations have become rich after the recent run-up in Gamuda’s share price. We cut our FY20–21F net profit forecasts by 7% and 4% respectively, but raise our FV by 9% to RM3.02 (from RM2.78) based on “sum of parts” (SOP) (Exhibit 1). This values its construction business at 12x forward earnings (from 10x previously), to reflect a reduced market risk premium as investors globally have turned risk-on on optimism on the economy reopening.

• The earnings downgrade is to better reflect the direct and indirect impact of the movement control order (MCO) and conditional MCO from 18 Mar to 9 June 2020 on Gamuda’s construction activities, property sales and toll road collections.

• Meanwhile, we expect Gamuda’s 9MFY20F results, due out by the end of the month, to come in at RM440mil to RM450mil at the net level. This will translate to a 14–16% YoY decline vs. a RM521.2mil net profit registered in 9MFY19, with the key culprit being the 6-week direct and indirect impact of the MCO and conditional MCO during the quarter on construction activities, property sales and toll road collections.

• Given the still elevated national debt and the still depressed 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.

• Zooming in on Gamuda, at 16–18x forward P/E, we believe the market has priced in a blue-sky scenario which could be a tad too optimistic given the unfavourable news flow of late including:

1. Contrary to the market speculation, the KL-Singapore High Speed Rail (HSR) project (of which Gamuda is expected to garner a significant slice of action) has not been revived. Instead, the governments of Malaysia and Singapore have agreed to extend the deferment of the project to 31 Dec 2020 from 31 May 2020;

2. Contrary to market expectations, the MRT3 project has not been included in the newly announced short-term National Economic Recovery Plan (Penjana). Recall, Gamuda is pitching to the government the idea to earmark the RM21bil project as one of the “anchor” shovel-ready infrastructure projects to pump-prime the economy in the aftermath of 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); and

3. There has yet to be indication from the new government that it will honour the RM2.36bil toll concession disposal deal signed between the previous administration and Gamuda, of which proceeds will come in handy for Gamuda if the Penang state government decides to fund 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) under the Penang Transport Master Plan (PTMP) project via a contractor financing/deferred payment scheme.

To recap, under the scheme, the appointed contractor for the PSR project 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 and also 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.

Source: AmInvest Research - 10 Jun 2020