Investment Highlights

• We maintain our forecasts but cut our FV by 35% to RM3.89 (from RM5.95 previously) and downgrade our call to HOLD from BUY. Our revised FV is based on 12x CY19F FD EPS of 32.4sen (from SOP previously), in line with our reduced benchmark target forward PE of 11-13x for large-cap construction stocks (from 14-16x previously).

• Amidst the uncertain outlook for Gamuda’s key divisions, i.e. construction (due to the review of mega projects by the government), property (due to the prolonged sector slowdown) and infrastructure (due to the potential abolishment of highway tolls and the nationalisation of water assets), we believe that the market will derive greater comfort by valuing Gamuda in its entirety based on its nearterm earnings potential, i.e. PE (vs. a combination of PE, RNAV and DCF. This accords more generous valuations to long-term assets such as landbank and concessions that may not be realisable under the current environment).

• Prime Minister Tun Dr Mahathir Mohamad told the media on Monday that the KL-Singapore High-Speed Rail (HSR) will be scrapped. This means that the project delivery partner (PDP) contract awarded by MyHSR Corp to a 50:50 Gamuda-MRCB JV in April 2018 for Package 1 (North) from KL to the MelakaJohor border is now likely to be revoked. The same goes for the PDP contract for Package 2 (South) from the Melaka/Johor border to Johor/Singapore border awarded to a YTL-Tabung Haji JV).

• We are keeping our forecasts as we have yet to impute into our numbers any contribution from the project.

• While the latest development is negative to Gamuda, it is not totally unexpected. We believe the prospects of the local construction sector have weakened, as the government reconsiders various mega infrastructure projects on grounds of fiscal prudence. Apart from the KL-Singapore HSR, we believe more mega projects could potentially be deferred, scaled down or cancelled. Also, the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for players.

• Not helping either, are the prolonged downturn in the local property market that weighs down on Gamuda’s property division, coupled with the uncertainty arising from the potential expropriation of Gamuda’s toll road and water concessions.

Source: AmInvest Research - 30 May 2018