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.

• MyHSR Corp has announced the winning bids for the project deliver partners (PDP) for the RM60bil KL-Singapore High Speed Rail (HSR) project. A 50:50 Gamuda-MRCB JV has been awarded the Package 1 (North) from KL to the Melaka-Johor border, while a YTL-Tabung Haji JV (via their respective units, Syaraikat Pembinaan Yeoh Tiong Lay Sdn Bhd and TH Properties Sdn Bhd) has won the Package 2 (South) from the Melaka-Johor border to the JohorSingapore border.

• We are surprised by the timing of the award, which is three months ahead of expectations. We have also expected it to happen after the award of the MRT3 (which is still pending).

• No doubt, the latest development is positive to Gamuda. Assuming the job is to be equally divided among the four parties, Gamuda’s share of the PDP work will be RM15bil. Assuming a PDP fee of 6%, Gamuda’s potential PBT from the job is RM900mil, over a construction period ending 2026. Given the scale of the project, we believe preparatory works will take at least two years before substantial physical work could commence on the ground. This means meaningful contributions from the project would only kick in from FY21 (July), which is beyond our 3-year forecast period of FY18-20F (July).

• We are keeping our valuations for Gamuda (FV of RM5.95) as we are already valuing Gamuda's construction business on a P/E basis which implies that Gamuda will be able to consistently replenish its order book to sustain earnings.

• Nonetheless, we do expect Gamuda's share price to react positively. The share price appreciation will be driven by a multiple re-rating, rather than an earnings re-rating.

• At the current price, Gamuda in its entirety trades at a forward P/E (FY19F) of 15x. As Gamuda’s earnings visibility improves with the contract award, the forward P/E should rise towards the implied 18x based on our FV of RM5.95. Based on our estimates, every 1x multiple re-rating of Gamuda translates to a 33 sen appreciation in share price.

• We continue to like Gamuda given: (1) it being the market leader in the local construction market backed by its tunnelling expertise and track record as project delivery partner in rail projects; (2) its resilient property profits underpinned by overseas projects and highly successful local township projects despite the soft property market; and (3) its recurring earnings from toll road and water concessions.

Source: AmInvest Research - 6 Apr 2018