Revival Of Shelved Projects In The Cards

The recent industry events reaffirm our BUY call on Gamuda. We understand the company has been actively engaging various stakeholders to discuss the potential revival of shelved mega projects with alternative options. Also, the potential disposal of its 40% stake in SPLASH is expected to proceed when restructuring and takeover discussions are completed by early-Aug 18. Maintain BUY and target price of RM4.49.

WHAT’S NEW

• High probability of PTMP going ahead. We expect the RM32b Penang Transport Masterplan Plan (PTMP) to get Putrajaya’s nod soon following recent newsflow. The Penang state government indicated it will consider requesting for a RM1b soft loan from the federal government to expedite the implementation of PTMP, which includes developing the LRT and Pan Island Link 1 (highway) projects simultaneously, subject to approval from relevant authorities which is expected as early as this year-end. In addition, the state government highlighted that the loan proceeds would be used as a bridging loan to carry out the PTMP project while it plans to sell land to the project delivery partners (PDP) at a later date as the state believes the reclaimed land’s valuation will increase over time.
• On a brighter note, we believe construction works for the PTMP will commence as early as mid-19 and will keep the SRS consortium (Gamuda owns 60%) busy for the next 6-10 years until the completion of the entire project. Through this PTMP project rollout, we estimate the SOTP valuation for Gamuda will be enhanced by RM0.13/share, assuming PDP fees of 5%. Gamuda can tender for contracts works of the PTMP projects even if it is the PDP for the project. Its bids will be subjected to assessment by independent parties other than the SRS consortium. Meanwhile, it is too preliminary to ascertain the earnings impact from the construction works (assuming Gamuda wins any of the PTMP construction job packages) as details of the projects have yet to be finalised.
• Light at the end of the tunnel for SPLASH? Syarikat Pengeluar Air Sungai Selangor’s (SPLASH) woes are expected to be over soon after recent news highlighted the process of the takeover is 80% completed and should complete by early-Aug 18. Gamuda, which owns 40% of SPLASH, is expected to benefit from the disposal which is worth an estimated RM1.2b based on Gamuda’s stake. The company guided that the cash proceeds from the disposal will be partially distributed to shareholders and for working capital. Gamuda’s stake in SPLASH is worth RM0.50/share.

STOCK IMPACT

• Long-awaited PTMP is likely to proceed. In 2015, the state government appointed SRS Consortium to become the PDP for the implementation of PTMP based on its extensive expertise in mass rail transit and related public transport infrastructure, as well as largescale township development. The PTMP consists of the development of LRT as well as Pan Link Island 1 (combined development cost of RM16b) to connect Georgetown to Penang International Airport. The project is expected to be funded by: a) proceeds from the sale of reclaimed land totalling 1,800ha off the southern coast of Penang (valued at RM16b), b) proceeds from sale of residential projects developed on the reclaimed land; and c) the federal government partially.
• Proposing option for shelved projects. Gamuda is engaging respective stakeholders to propose an alternative option for the MRT3 construction with a lower construction cost of RM20b. To recall, the RM42b MRT3 project was shelved in early-Jun 18. The proposed scaled-down option consists of an underground tunnel (35% of project) and the elevated portion (65%) vs 80% and 20% previously. The enhancement to our SOTP valuation for Gamuda from the revival of MRT3 is RM0.30/share, derived partially from PDP fees of 5% (assumed) and construction works for the underground portion portion for the projects which are now worth RM20b. We strongly believe the MRT3 contract will be awarded to Gamuda largely due to: a) its good track record for projects like MRT1 & 2; and b) the new government preferring to use local contractors. As Gamuda is one of the leading local contractors, it will have the additional advantage over other local peers.
• MRT2 undergoing cost review. Meanwhile, we expect the government to be exploring the viability of reducing the construction cost of MRT2 which it claimed to have ballooned to RM50b. However, it is too early to assess the impact of the MRT2 cost review, but the company does not expect any material impact on the project’s margins.
• Diversifying construction tender book. Realising the need to diversify its construction tender book for earnings sustainability in the future, Gamuda has bidded for several 5-6 underground tunnelling jobs for the MRT in Singapore with contract values ranging S$300m to S$500m per package. We understand the bids put forth by Gamuda are fairly competitive, with it being the third lowest bidder in the latest tender earlier this year. With its compelling competitive bids coupled with its extensive expertise, we expect Gamuda to secure some tunneling jobs in Singapore. To-date, Gamuda has yet to secure any tunnelling work contracts from the Land Transport Authority of Singapore.
• Outstanding orderbook of RM6.4b. Gamuda’s current outstanding construction orderbook stands at RM6.4b (mostly from the underground tunnelling works for MRT2 and the Pan Borneo Highway project), or 5.2x its 2017 construction revenue. These works would last for at least three years.
• Property arm to remain soft. Gamuda highlighted that its property sales would remain soft in the coming quarters largely due to: a) high base of overseas property revenue from the recent quarter, driven by better-than-expected sales in Singapore; and b) a subdued domestic property market. However, the company remains hopeful that the launch of Gamuda Cove (GDV: RM20b) by end-18 could improve its earnings. Also, the company is identifying strategic land pockets in Singapore to develop high-rise residential projects which have strong demand in Singapore
• IBS capacity to increase by end-18. The second plant in Banting is expected to commence by 4Q18 with an annual capacity to build 5,000 apartment units (ie affordable homes like PR1MA) for both internal and external projects. Its existing plant in Sepang has an annual capacity of 3,000 apartment units to cater to its own projects. We expect earnings from IBS to improve significantly on the aggressive rollout of affordable homes which requires the use of IBS technology.

EARNINGS REVISION/RISK

• No change to our earnings estimates.

VALUATION/RECOMMENDATION

• Maintain BUY and SOTP-based target price of RM4.49. Our target price implies 14.1x FY19F PE, which is -0.5SD below its long-term mean PE of 15.7x.
• Upside to our target price. We have not incorporated any option value of Gamuda taking on new mega projects, eg PTMP.

SHARE PRICE CATALYST

• Securing mega construction jobs.
• Sale of SPLASH at close to book value.

Source: UOB Kay Hian Research - 24 Jul 2018