- We maintain our BUY recommendation on Gamuda Bhd, with our fair value lowered slightly to RM4.36/share (from RM4.40/share previously) on a 10% discount to its revised sum-of-parts (SOP) value.

- The revision takes into account a 12% cut in FY13F net profit (~ 4 sen/share) after accounting for a one-off charge of RM91mil incurred from arbitration proceedings between the MMC-Gamuda JV and Wayss & Fraytag in relation to the SMART tunnel project.

- To recap, the arbitration proceedings relate to the subcontracting works awarded to Wayss & Freytag in January 2006 that was subsequently terminated by the JV for alleged delays.

- The sub-contract relates to the north tunnel drive of the SMART tunnel.

- In an updated announcement to Bursa Malaysia yesterday, Gamuda revealed that there is an additional cost of RM28mil (Gamuda’s effective 50% stake: RM14mil) on top of the RM105mil that the JV was required to pay two days ago.

- The additional amount relates to interest charges of 4% that was pegged to Wayss & Fraytag’s awarded claims of RM96mil starting from the date the latter’s sub-contract was terminated.

- In addition, Gamuda disclosed that the cost incurred by the JV to complete the works that is irrecoverable stood at RM50mil.

- Stacking it up, Gamuda’s effective share of the claims amount to approximately RM92mil which we expect it to be charged out in FY13F.

- But, we view the claims as one-off in nature and Gamuda is on track to deliver a record FY13F core net profit of RM603mil (+10% YoY).

- Furthermore, we see lesser execution risk for the ongoing Sg.Buloh-Kajang (MRT) project that the MMC-Gamuda JV is currently undertaking.

- Apart from being the Project Delivery Partner (PDP) for the above-ground portion, the JV is directly involved in driving the tunnelling package.

- We view share price weakness today as an opportunity to accumulate the stock. Order book prospects – currently a healthy ~RM4.2bil – are expected to improve further postelections, with Gamuda primed to be in the running for a couple of big ticket jobs.

Source: AmeSecurities