- We maintain our BUY call on Gamuda with a slightly higher fair value of RM5.40/share (5% discount to its Sum-Of-Parts (SOP) value.

- Gamuda announced on Bursa Malaysia that it was unable to accept the Selangor government’s most recent offer (through state-backed Kumpulan Darul Ehsan Bhd or KDEB) last month to takeover its 40%-owned associate, SPLASH. The other shareholders of SPLASH are Kumpulan Perangsang Selangor Bhd (KPS) and The Sweet Water Alliance – which each holding a 30% stake.

- In its announcement, Gamuda highlighted three key points that underpinned its decision not to accept the offer:-

- (1)The payment of surplus of SPLASH’ surplus book value of assets over liabilities was not included in this latest offer, unlike the previous one in February 2013 – resulting in an approximately 90% reduction in the offer value vis-avis the latter.

- (2) Gamuda opines that the valuation methodology for SPLASH’ 12% return on equity is unfair, as it does not

take into account the remaining tenure of SPLASH’s concession.

- (3) KDEB had not indicated if the existing operations and maintenance operators (O&M) of SPLASH would be retained post the takeover. We believe this partly relates to Gamuda’s 80%-owned Gamuda Water, which does O&M works for SPLASH.

- We are not surprised with this late development – as we had downgraded the water sector to NEUTRAL due to uncertainties over certain terms of the Selangor government’s latest offer.

- Based on our estimates, the state’s latest offer for SPLASH falls c.25% shy of our base valuations of RM978mil –pegged to the Selangor government’s earlier offer in February 2013. Furthermore, we have also valued Gamuda water at RM312mil, bringing its total value of water assets to c.RM1.2bil (or RM0.53/share).

- This news may weight down on Gamuda’s share price today. There were expectations earlier that Gamuda may consider dishing out special dividends, had the SPLASH disposal gone through this time around.

- We nevertheless believe that the prime mover for Gamuda’s share price still lies with the upcoming Klang Valley MRT 2 project. The MMC-Gamuda JV frontrunner to be appointed as the Project Delivery Partner (PDP).

Source: AmeSecurities