3QFY18: Sufficient Optimism

3QFY18 PATMI of RM201m is in line with expectations. Earnings were driven by both the construction and property divisions. Outstanding construction orderbook stood at a healthy RM6.4b. The MRT2 project’s progress is gaining momentum, but we are trimming FY19-20 forecasts to reflect the cancellation of the HSR and MRT3 projects. Maintain BUY, but we introduce a lower target price of RM4.49, implying FY19F PE of 14.1x, which does not incorporate the option values of new mega projects.

RESULTS

• Results in line with expectations, with 3QFY18 net profit of RM200.7m (-5.0% qoq, +17.4% yoy), on revenue of RM1.2b (+23.4% qoq, +47.4% yoy). Gamuda’s yoy earnings growth was driven mainly by the construction division (+38.7%), followed by the property division (+16.7%). 9MFY18 net profit represents 72.3% of our estimate and 77.0% of consensus estimate.
• Construction division to gain momentum; MRT Line 2 progressing well. We expect the construction division to deliver stronger earnings in the upcoming quarters, with two tunnel boring machines having commenced works for the MRT Line 2 (started in Mar 18 and May 18). The cumulative financial progress for the MRT Line 2 construction has reached 25% as at 31 May 18, with about 98% of total project works awarded, totaling >RM31b. Meanwhile, ongoing construction works at the Pan Borneo Highway project would also contribute to earnings, with mainstream works having reached 25% of work done to date – refer to RHS table.
• Property division picking up from a low base. Earnings growth from the property development division is gaining momentum, mainly driven by the strong sales achieved from its overseas developments, Vietnam and Singapore. PBT for the division increased by 6.2% qoq and 16.7% yoy to RM50.5m. The bulk of the sales came from Celadon City and Gamuda City in Vietnam. However, margins declined slightly due to: a) high start-up costs for new township developments; and b) margins from unbilled sales are low given that most of the developments are overseas (which carry lower margins).

STOCK IMPACT

• PTMP may eventually be given the green light. Gamuda is optimistic that the Penang Transport Master Plan (PTMP) would be given the green light as there will be greater Federal-State cooperation following Pakatan Harapan’s general election win. Recall that in Aug 15, SRS Consortium (Gamuda owns 60%) was appointed by the Penang government as the project delivery partner (PDP) for the implementation of the PTMP. Major components of the project are: a) LRT from George Town to Penang International Airport, b) the Pan Island Link 1 highway, and c) land reclamation works. Gamuda expects to obtain some approvals required for the progress of the project by 4Q18. However, the success of this project requires buoyant property demand as SRS Consortium would be paid in kind by the Penang government via property reclamation rights. At this stage, we have not yet factored any contribution from this project.
• Government shelved HSR and MRT3 projects; MRT2 undergoing cost review. The government has shelved the KL-Singapore High Speed Rail (HSR) and MRT3 projects until the government’s fiscal position improves. In addition, the government is exploring the viability of reducing costs relating to the ongoing MRT2 project. It is too preliminary to assess the impact of the MRT2 cost review, but the company does not expect material impact on project margins. On a positive note, foreign competition for future mega projects will be greatly reduced as the new government prefers local contractors.
• Outstanding orderbook at RM6.4b. Gamuda’s current outstanding construction orderbook stands at RM6.4b (mostly from the underground tunneling works package for MRT2 and the Pan Borneo Highway project), about 5.2x 2017 construction revenue cover, which would last for at least 3 years.
• Secured RM700m in property sales in 3QFY18 (+17% yoy), bringing 9MFY18 property sales to RM2.6b, representing 74% of its sales target of RM3.5b for FY18. Sales were mainly driven by its overseas projects (two-third of total sales) in Vietnam and Singapore. Margins should hover at current levels given: a) high upfront costs for new township developments in the Klang Valley, and b) higher recognition of overseas projects. Additionally, Gamuda is expecting to launch Gamuda Cove (GDV: RM20b) by end-18.

EARNINGS REVISION/RISK

• We reduce our forecasts by 5%/10% for FY19/20 respectively as we reduce our orderbook win assumption to RM1.5b from RM5b for FY19/20. We maintain our FY18 net profit forecast.

VALUATION/RECOMMENDATION

• Maintain BUY and introduce a lower SOTP-based target price of RM4.49 (from RM6.00), as we: a) lower the PE multiple for the construction segment to 12x (from 16x) to reflect the sector’s de-rating, b) lower our annual orderbook win assumption to RM1.5b, and c) factor in no conversion of existing warrants. Our target price implies a FY19F PE of 14.1x.
• There is upside to our new target price which conservatively has not incorporated any option value of Gamuda taking on new mega projects.

SHARE PRICE CATALYST

• Securing more construction jobs.
• Positive newsflow on the Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) disposal.

Source: UOB Kay Hian Research - 28 Jun 2018