Investment Highlights

• We maintain our BUY call, forecasts and SOP-based FV of RM5.95 (Exhibit 2) 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's 1HFY18 net profit came in at 55% and 52% of our full-year forecast and the full-year consensus estimates respectively. However, we consider the results within expectations as: (1) Gamuda’s quarterly construction profits could be volatile (depending on billings which could fluctuate), and 1Q and 2QFY18 numbers happened to come in at the top end of the range; and (2) there could be downside risk to its overall property margins in the coming quarters as overseas projects, which typically command lower margins vs. local projects, have dominated recent sales, coupled with continued start-up losses from newly launched township projects locally such as Gamuda Gardens, Twentyfive.7 and Gamuda Cove.

• Its 1HFY18 net profit jumped 26% YoY driven largely by the construction division as the progress on the MRT2 project gathered momentum.

• Gamuda expects a “favourable” decision from the government with regards to its bid for the RM45bil MRT3 turnkey contract via a 45:45:10 JV between MMC, itself and George Kent, and that the award could come “within weeks”. The contract is currently a two-horse race between the JV and China Communications Construction Company (CCCC).

• Gamuda said that there have been “many twists and turns” since Nov 2017 when the government announced that MRT3 would be carried out via a “build and finance” model, and Chinese and Japanese contractors were deemed to have an upper hand over local contractors, given the backing from their governments to provide soft loans for infrastructure projects in developing countries.

• In terms of financing, Gamuda confirmed recent news reports that the JV has put in place a funding proposal backed by a consortium of “local and foreign banks”. Alternatively, the government may revert to SPV funding via Dana Infra for MRT3, as in the case of MRT1 and MRT2 (which means the “build and finance” model could effectively be scrapped).

• Gamuda believes that it has formed a “formidable” 50:50 JV with MRCB in its bid for the project delivery partner (PDP) role for civil works (RM35-40bil) of the KL-Singapore high speed rail (HSR) project. However, Gamuda is not taking its competitors lightly, particularly, the IJM-SunCon-LBU and YTL-SIPP consortiums.

Source: AmInvest Research - 26 Mar 2018