Investment Highlights

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

• Gamuda held an analyst briefing last Friday in place of this Friday’s cancelled 1QFY18 results briefing.

• Gamuda updated analysts on its strategy on key projects it is currently pursuing:

1. MRT3 – Gamuda conceded that given the “build and finance” model, a foreign contractor, either Chinese or Japanese, is likely to emerge the main contractor for the project. However, Gamuda is optimistic that it could still “work its way into the project” given: (1) the local participation requirement of >40% imposed by MRT Corp; (2) it has a strong value proposition as a local partner given the database in its possession on the entire MRT project (especially, soil conditions) by virtue of it being the original master planner for the entire project; and (3) its possession of 12 tunnel boring machines that are in good working condition.

2. KL-Singapore high-speed rail (HSR) – Gamuda expects competition for the project delivery partner (PDP) role, of which it is bidding via a JV with MRCB. Gamuda believes the Gamuda-MRCB JV technically has an edge over the consortium formed by IJM, Sunway, Maltimur Resources and Jalinan Rejang (we hereon denote the consortium as “IJM-Sunway-LBU JV” as Maltimur Resources and Jalinan Rejang are controlling shareholders of Lebuhraya Utara Sdn Bhd [LBU], the PDP appointed for the Pan Borneo Sarawak highway).

This is because the Gamuda-MRCB JV has a strong track record as PDPs for rail projects, i.e. the MRT1 and MRT2 for Gamuda and the LRT3 for MRCB, while the IJMSunway-LBU JV’s PDP track record is in road projects, i.e. the West Coast Expressway for IJM and the Pan Borneo Sarawak highway for LBU.

We will not be surprised if YTL decides to join the fray in the bidding for the KL-Singapore HSR PDP role given that YTL was the one who first mooted the project back in the 1990s.

Gamuda doubts that its competitors will undercut the PDP fee (vs. the current benchmark of 6%) given the much higher risks of execution, cost overrun and liquidated and ascertained damages (LAD) arising from late delivery for the KL-Singapore HSR project.

3. East Coast Rail Link (ECRL) – Gamuda is still in talks with China Communications Construction Company (CCCC), the main contractor for ECRL, for the last ECRL first-line subcontract spanning over 150km, which is worth RM5–7bil based on our estimates. To recap, CCCC has divided the RM55bil project into eight first-line subcontracts and awarded all but one to its subsidiaries. Gamuda said that there is competition for the last first-line subcontract as a “friendly competitor” is also talking to the Chinese.

• With these mega projects on its radar, Gamuda guided for job wins of RM6–8bil annually over the short term. Given the lumpy size and low predictability in terms of the timing of the award, our forecasts conservatively assume Gamuda to only secure RM2bil new jobs annually in FY18-20F. Its construction order backlog stands at RM7.3bil at present (Exhibit 2).

• Separately, Gamuda has emerged the second lowest bidder for the recent Contract 715 of the Land Transport Authority (LTA), Singapore – “Construction of cut and cover and bored tunnels for North East Line extension” at a tender price of SG$83mil (RM249mil) vs. SG$79mil (RM237mil) submitted by the lowest bidder China State Construction Engineering Corp Ltd (Exhibit 3). Gamuda said that there is possibility that the LTA may decide to award the contract to Gamuda to reduce the concentration risk as China State Construction Engineering Corp Ltd has already won two contracts from the LTA recently. Gamuda intends to continue participating in LTA tenders in Singapore – one way to sharpen its competitive edge vs. various global construction giants.

• Gamuda recorded RM903mil property sales in 1QFY18, on track to achieve its FY18F sales target of RM3.5bil. Overseas projects (Vietnam, Singapore and Australia) continued to dominate, contributing about two thirds of total sales in 1QFY18, with local projects making up the balance. This is consistent with our view that these overseas markets are ahead of Malaysia in terms of their recent boom-bust cycles. They have been through the consolidation phase and are now on a recovery path.

• We continue to like Gamuda given: (1) its market leader position in the local construction market backed by its tunnelling expertise and track record as PDP in rail projects; (2) its resilient property profits underpinned by overseas projects and local township projects that are well received by the market; and (3) its recurring earnings from toll road and water concessions.

Source: AmInvest Research - 11 Dec 2017