Investment Highlights

• We maintain our forecasts, SOP-based FV of RM5.95 (Exhibit 1) and BUY call. Our FV values 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.

• We confirm with Gamuda that MRT Corp has indeed decided to carry out MRT3, not by the project delivery partner (PDP) model used for MRT1 and MRT2, but via "build and finance" by a turnkey contractor.

• Given that the turnkey contractor will have to fund "not less than 90% of the expected project cost (of RM35bil to RM40bil)", we believe the race has narrowed down to only Chinese and Japanese contractors, who have backing from their governments to provide soft loans for infrastructure in developing countries.

• On a more positive note, Gamuda is confident that it will still likely to secure the tunnelling package of MRT3, irrespectively of the turnkey contractor, given its track record in MRT1 and MRT2, its fleet of existing tunnel boring machines, and more importantly its competitiveness in terms of cost.

• We take comfort that Gamuda's roles in MRT3 are potentially only reduced, but not eliminated following the latest development.

• In any case, the 40km MRT3 is predominantly underground (32km). Recall, Gamuda's PDP roles in MRT1 and MRT2 have been restricted to only the elevated sections. In other words, even if MRT Corp opted for the PDP model for MRT3, the scope of the PDP would only cover 8km anyway.

• We still believe Gamuda is the best proxy to the booming construction sector in Malaysia given its dominant roles in the MRT project (as the project delivery partner and tunneling contractor), and potentially in other mega rail-based projects in the pipeline such as the ECRL and KL-Singapore HSR.

Source: AmInvest Research - 7 Nov 2017