Investment Highlights

• We maintain our BUY call and forecasts, but raise our SOP-based FV by 5% to RM5.87 (from RM5.60) (Exhibits 1 & 2), as we roll forward our valuation base year to CY18 (from CY17), which more than offset a slight reduction in our property RNAV estimates. We value Gamuda's construction business at 16x CY18 net profit, in line with our benchmark 1-year forward P/E of 14-16x for large-cap construction stocks.

• TheEdgeProperty.com reported that Gamuda is returning Parcel B of Gamuda City (also known as Yenso Park) in Hanoi to the Vietnamese government. Quoting Gamuda Land Vietnam general director Chow Chee Fan, it said that the 500-acre commercial precinct of the 1,200-acre integrated property project has become “not worth developing” as Gamuda has to incur US$100mil (RM432mil) to relocate the existing occupiers. The saving grace is that the land to be returned include several lakes with a combined area of 300 acres. This means Gamuda is effectively only giving up 200 acres of land, equivalent to half of its unsold land in Hanoi of 400 acres.

• We believe Gamuda will be compensated or reimbursed, one way or another, for the 200 acres of land it is surrendering. Based on our estimates, the land has a carrying value of about RM150mil and it could have created an additional RM250mil NPV via development over the long term. This means Gamuda is effectively parting with some RM250mil potential value, translating to 9.5sen/share on a FD basis. In the worst case, assuming that the land cost is not reimbursed, the total value eroded will be RM400mil or 15.3sen/share on a FD basis. Our SOP-based FV now only reflects the RM150mil carrying value of the land (vs. RM150mil land carrying value + RM250mil NPV via development previously).

• The returning of the land will not affect Gamuda City’s ability to continue contributing about 5% to group profits. Chow guided for higher sales of US$150mil (RM648mil) in FY18F versus US$120mil (RM518mil) estimated for FY17F. Excluding the returned land, we estimate Gamuda City’s outstanding GDV still stands at about RM5bil at present.

• While the latest development appears to be negative to Gamuda, it is far from putting a significant dent to Gamuda’s fundamentals. Gamuda remains the best proxy to the booming construction sector in Malaysia given its dominant role in MRT (as the project delivery partner (PDP) and tunneling contractor) and its involvement in Pan Borneo Sarawak Highway. Its earnings visibility is strongly backed by an outstanding construction order book of RM8.3bil.

Source: AmInvest Research - 22 May 2017