Investment Highlights

• We maintain our forecasts but raise our FV by 8% to RM3.08 (from RM2.85) to reflect the net present value (NPV) of the potential project delivery partner (PDP) fee from the Penang Transport Master Plan (PTMP) project. Our FV is based on “sum of parts” (SOP), valuing its construction business at 12x forward earnings, in line with our benchmark forward target P/E of 12x for largecap construction stocks (Exhibit 1). Maintain UNDERWEIGHT.

• Gamuda, via 60%-owned SRS Consortium, on 1 Jul 20 signed the long-awaited project delivery partner (PDP) agreement with the Penang state government for the purpose of implementing several components of the PTMP project including: 1. Penang South Reclamation (PSR) comprising the reclamation of three man-made islands, i.e. Island A, Island B and Island C, with a total area of 4,200 acres at the southern tip of Penang Island; 2. The George Town – Bayan Lepas LRT (23.5km); and 3. Highway projects Pan Island Link 1 (19.5km) and Pan Island Link 2A (5km).

• Among the salient terms of the agreement are: 1. SRS Consortium will come out with RM1.3bil “bridging loan” to the state government (Gamuda’s 60% share is RM780mil, which will increase its net debt and gearing of RM3.2bil and 0.37x as at endApr 2020 to RM4.0bil and 0.46x that are still manageable); and 2. SRS Consortium will earn a PDP amounting to 5% to 5.75% of the project value.

• Assuming a project value of RM32bil (based on a rough guidance by Gamuda previously), a PDP fee of 5.5%, an implementation timeline of 16 years (or RM2bil per annum) and a discount rate equivalent to Gamuda’s WACC of 6.6%, our estimates show that the project carries an NPV of RM1,067mil in its entirety while Gamuda’s 60% share is RM640mil or 23sen per share on a fully diluted basis.

• While we are positive on the latest development, we believe it has been pre-empted by the market.

• Given the still elevated national debt and reduced 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.

• On a straight P/E basis, Gamuda’s valuations are rich at 16-17x forward earnings on muted growth prospects.

Source: AmInvest Research - 1 Jul 2020