Gamuda’s 1QFY20 numbers are deemed above our estimates, meeting 29.8% though in-line with consensus at 25.9% of full-year forecast. This is due to delays in the sale of the highway concessions to the Government, contributions of which had already been excluded. Overall, the Group reported a flat 1QFY20 core net profit of RM173.1m (-0.8% YoY) though falling 13.5% QoQ from RM200.2m in 4QFY19. Performance for the quarter was supported by its property segment with pretax profit jumping by 37.1% YoY while PBT margin expanded by 1.7ppt to 12.1%, mitigating lower earnings from the construction segment as a result of the reduction in MRT Line 2’s contract value. We revise our FY20 earnings estimate higher by 13.1% to reflect contribution from its highway concessions up to 3QFY20, as the deal is now only expected to be completed in April/May 2020. Our FY21/22 forecasts are maintained. Construction orderbook and unbilled property sales remain healthy at RM8.6bn and RM2.2bn respectively. Our Outperform rating and a TP of RM4.26 on Gamuda is affirmed. An interim dividend of 6sen per share was declared this quarter.

• Lower construction earnings mitigated by strong property earnings. The Group reported flat earnings in 1QFY20 with core net profit increasing by just 0.8% YoY to RM173.1m. Performance was mainly supported by the Group’s property arm which saw strong pretax profit growth of 37.1% YoY while PBT margin expanded by 1.7ppt to 12.1%, thanks to the Group’s Vietnam property business i.e. Celadon City in Ho Chi Minh City and Gamuda City in Hanoi which remained the biggest contributor to property earnings. Strong earnings growth in the property segment mitigated the impact of lower earnings from the construction segment which saw pretax profit decline by 13.1% YoY. Margin slipped by 2ppt.

• Property sales fell short of target, but expected to pick-up. The Group’s property sales for 1QFY20 of RM509m were below management’s target, achieving only 12.7% of full year plans. Overseas projects continued to perform well, contributing two-thirds of the sales. The Group has maintained its targets nevertheless with sales expected to pick-up from its domestic property launches and sales i.e. Gamuda Gardens, Twentyfive.7 and Gamuda Cove. Unbilled property sales remain healthy c. RM2bn.

• Construction orderbook healthy at RM8.6bn. Gamuda’s outstanding orderbook stands at RM8.6bn, suffice for recognition up to 2023. This is inclusive of a new project in Singapore worth SGD260m. Based on Gamuda’s stake of 45%, the project’s value owing to Gamuda will be around c. RM360m. The project which was won in an open tender and awarded by Singapore’s Land Transport Authority, is for the construction of a bus depot, part of the Singapore MRT project.
  
  Excitement for this segment will be more evident next year as management is expecting to secure projects in Australia through its 50% stake in Martinus Rail acquired recently. A shareholders’ agreement with Martinus is to be signed soon. The JV will jointly bid for the massive railway and infrastructure projects with total addressable market of AUD20bn up for grabs. Active tendering is expected to start in 1Q2020. We understand that the JV is eyeing 15 contracts valued at AUD8bn, to be secured within 1-2 years.
  
  We also expect to hear more developments from the Penang Transport Master Plan (PTMP) Phase 1 project as the Federal government has agreed to extend financial assistance to the LRT project. While signing of the PDP agreement is targeted for January 2020, LRT and Pan Island Link highway construction and land reclamation works are likely to commence in late 2H2020 as detailed engineering design, tendering activities etc. will only commence upon signing of the PDP agreement with the State government.
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• Disposal of toll assets to complete in April/May 2020. The disposal of Gamuda’s four concession assets to the Government is expected to conclude in April/May next year after approval was disclosed in the Budget 2020 announcement. Negotiations on the terms and conditions of the definitive agreements are expected to be completed in January 2020 while the EGM is expected to be held in March 2020.

Source: PublicInvest Research - 16 Dec 2019