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.

• Various sources are pointing to an impending announcement of the winning bid for the MRT3 turnkey contract from the government. To recap, the RM45bil contract for the circle line spanning over 40km in the heart of Kuala Lumpur is currently a two-horse race between a 45:45:10 Gamuda-MMC-George Kent JV and China Communications Construction Company (CCCC).

• We understand that the Malaysian contractors are back in the picture as the government may now be open to ideas other than the initial "build and finance" model for the implementation of the project (In any case, the Malaysian contractors have also put in place a funding proposal backed by a consortium of “local and foreign banks”).

• To recap, in Nov 2017, the government announced that the MRT3 would be carried out via a “build and finance” model, and foreign contractors, especially the Chinese and Japanese, were perceived to have a competitive edge over local contractors given the backing from their governments to provide soft loans for infrastructure projects in developing countries.

• No doubt, it will be highly positive to Gamuda if the Gamuda-MMC-George Kent JV is to bag the MRT3 turnkey contract. However, the impact on Gamuda's earnings will not be immediate. Gamuda guided for 18-22 months of preparation works (after the contract award), before substantial physical work could commence on the ground, based on its experience with the MRT2 project. 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).

• Similarly, the impact on our valuations for Gamuda (FV of RM5.95) would be rather muted. This is because 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 — the MRT3 would just come in in time to fill up the vacuum left by the MRT2 (which would have been completed by then).

• Nonetheless, we do expect Gamuda's share price to react positively, assuming that it is to win the contract. 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 14.7x. As Gamuda’s earnings visibility improves with the award of the MRT3 contract, 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 - 5 Apr 2018