- Maintain BUY on Gamuda with a lower fair value of RM5.25/share (vs. RM5.40/share previously), based on an unchanged 10% discount to its sum-of-parts (SOP) value. Our earnings model is largely unchanged after the release of its 2QFY14 results. But, its lower fair value factors in a more conservative value for its water assets that is partly offset by a higher valuation for KESAS.

- 1HFY14 earnings jumped by 11% YoY to RM336mil (2QFY14: +3% QoQ) or 51% of our full-year forecast (consensus: 49%). Construction profits rose by 10% YoY, anchored by the Sg.Buloh-Kajang (SBK) MRT line.

- Progress for the elevated and tunnelling portions has reached 24% and 34%, respectively. Normalised construction margins (~8% in 1HFY14) will likely remain stable for the next half-a-year, as tunnelling works enter its challenging phase (42% out of 7.5km mined to date).

- New property sales – although slower QoQ at RM405mil in 2QFY14 – were still decent, taking the 1H tally to RM980mil (+60% YoY) and on track to meet its FY14F target of RM1.9bil (unbilled sales: ~RM1.7bil). The group is setting aside ~RM1.5bil for new land bank in Johor, Klang Valley and Kota Kinabalu over the next two FYs.

- Gamuda foresees the recent cooling measures to impact Johor more than the Klang Valley market. Even so, Horizon Hills chalked up RM400mil in new sales in the 1H – on track to meet its full-year target of RM800mil.

- With its earnings trajectory intact, the cabinet has approved the second MRT line worth ~RM25bil. This could soon pave the way for the award of its Project Delivery Partner (PDP). Plans are afoot to bring forward the project to 4Q 2015 from 1Q 2016.

- Given its existing role in the SBK line, we tip the MMC-Gamuda JV as winners for both the project’s PDP and tunnelling contracts, although the latter could only be awarded together with the other packages from 2HFY15 onwards.

- We have upped our valuation for KESAS by ~1.3x to RM687mil following the purchase of a further 20% stake from AmCorp (RM280mil). This values KESAS at ~2% short of its implied value of RM1.4bil based on Gamuda’s revised offer in Dec 2013.

- There is still no clear resolution to the water impasse for now. Our revised valuation for Gamuda’s water assets is RM1.2bil (RM0.50/share) – with SPLASH pegged at a 10% discount to its book value. It will likely re-distribute the bulk of proceeds from any water asset disposals to its shareholders.

Source: AmeSecurities