Investment Highlights

• We keep our earnings forecast for FY18F but cut those of FY19F and FY20F by 11% and 12% respectively and reduce our FV by 11% to RM3.48 (from RM3.89). We maintain our HOLD call.

• The earnings downgrade is to reflect lower project delivery partner (PDP) fees and tunnelling margins from the MRT 2 project. Our new FV is based on 12x revised CY19F FD EPS of 29.0 sen, in line with our benchmark target forward PE of 11-13x for large-cap construction stocks.

• Gamuda's core 9MFY18 net profit of RM604.5mil (excluding disposal and forex gains) came in within expectations at 81% of our full-year forecast and 76% of the full-year consensus estimates respectively.

• Its 9MFY18 core net profit jumped 21% YoY driven largely by the construction division as the progress on the MRT 2 project gathered momentum.

• Gamuda recorded RM2.6bil property sales for 9MFY18, on track to meet its FY18F sales target of RM3.5bil. Overseas projects (especially Vietnam and Singapore) continued to dominate, contributing about two-thirds of total sales in 9MFY18, with local projects making up the balance.

• Gamuda acknowledged the risk of potentially lower earnings from the remainder of the MRT 2 project, both the PDP contract for the elevated portion (22% completed) as well as tunnelling for the underground portion (31% completed), as the government explores ways to cut costs on mega projects.

• Gamuda believes the government could reduce the cost of the MRT 2 project by: (1) shortening the overall alignment by cancelling the stretch in Putrajaya (that is projected to have low ridership anyway); and (2) doing away with the two underground stations in Bandar Malaysia (as the development of Bandar Malaysia, anchored by the KLSingapore high-speed rail [HSR] terminus, has now been put on hold). Gamuda appeared to have come to terms with the reality that its current PDP fees and tunnelling margins for MRT 2 may be subject to downward revisions. We are reflecting this with the earnings downgrade.

• While sounding bullish on the RM32bil Penang Transport Master Plan (PTMP) project, Gamuda guided for at least another year before the project could hit the ground. Already approved by the state government, Gamuda is now more optimistic that the approvals from the federal government (the Transport Ministry and Department of Environment) will be forthcoming, following the recent change in the political landscape at the federal level.

Source: AmInvest Research - 28 Jun 2018