Investment Highlights

• We cut our FY18-19F earnings forecasts by 11% each, trim our FV by 3% to RM3.36 (from RM3.48), but maintain our HOLD call.

• Our new FV is based on 13x revised CY19F FD EPS of 25.8 sen, from 12x previously. The higher P/E multiple is to reflect: (1) Gamuda’s reduced risk premium with the impending resolution to the long-standing Splash debacle; and (2) our widened benchmark forward target P/E of 10-13x for large-cap construction stocks (from 10-12x previously) to reflect the slight improvement in the sentiment towards construction stocks of late.

• The Selangor state government, via Pengurusan Air Selangor Sdn Bhd, has made a takeover offer for water producer Syarikat Pengeluaran Air Selangor Sdn Bhd (Splash) for RM2.55bil cash (RM1.9bil upfront cash while the balance RM650mil via nine annual instalments a year after the completion of the deal; until settled, the balance is entitled to interest at 5.25% per annum from the date of the completion of the deal). The offer will close on 10 Aug 2018.

• While the latest development is positive to Gamuda, we believe it has been fully priced in by the market.

• At RM2.55bil, the deal values Splash at 0.73x its book value of about RM3.5bil. We believe Gamuda, who owns a 40% stake in Splash, will accept the offer. We believe Gamuda will be willing to settle for a valuation which is at a 27% discount to Splash’s book value (and at about a 35% discount to its DCF based on our estimates) as it realises that the water production concession held by Splash is no longer sustainable.

• This is because water distributor Syabas, the sole offtaker for the treated water it produces, has not been able to settle the amounts billed by Splash due to its inability to raise tariffs despite rising costs (including the bulk water supply rate). Syabas also has not been able to embark on initiatives to reduce non-revenue water (NRW) due to the lack of funding.

• The earnings downgrade is to reflect the share of profits foregone from its 40% stake in Splash, partially mitigated by interest savings from the RM1.02bil (RM2.55bil x 40%) disposal proceeds. The disposal proceeds will reduce Gamuda’s net debt and gearing of RM4.3bil and 0.55x as at end-April 2018 to RM3.3bil and 0.42x respectively.

Source: AmInvest Research - 6 Aug 2018