• 2QFY19 core earnings declined -22.6% on yoy basis due to SPLASH disposal, while remain flat at 0.6% on qoq basis.
• However, 1HFY19 core earnings ran ahead of our forecast at 55.3% as the margin pressure after MRT2 cost reduction exercise was shared with subcontractors.
• We are neutral on the highway takeover as management expects negotiation to be at arm’s length basis instead of expropriation.
• Property presale is expected to be stronger in 2HFY19 driven by Gamuda Cove and Vietnam projects.
• BUY with SOP-derived TP of RM3.35. Its current orderbook of RM10.5bn and unbilled property sales of RM2.2bn provides earnings visibility for another 3-4 years.

Margin pressure shared with subcontractors

Gamuda 2QFY19 core earnings declined -22.6% yoy due to SPLASH disposal, while remain flat at 0.6% qoq. However, 1HFY19 ran ahead of ours and consensus forecast at 55.3% and 54.6% respectively as margin pressure from the MRT2 cost reduction exercise was shared with subcontractors. To recap, total construction cost for MRT2 was reduced to RM30.5bn from RM39.4bn in Oct 2018 by reducing work scope and various initiatives. As adoption of the Turnkey model (from PDP) mainly remains at its incorporated JV, we lowered our FY19FFY21F turnover by 26.7%-28.6% to reflect the status quo.

Neutral on highway concession takeover

On Feb 2019, Government began talks with Gamuda to negotiate the acquisition of its highway concessions. We remain neutral on the outcome as management expects it to be on an arm’s length basis instead of expropriation. This could avoid unsettling capital market as it requires shareholders approvals (Gamuda > 50%, Litrak > 75%). To highlight, our valuation for all four highways (KESAS, LDP, SPRINT and SMART) stands at RM2.2bn.

RM4bn presales FY19 target remains intact

Despite weak presales 1HFY19 hitting only RM1.3bn, management retains its RM4bn target in FY19 backed by strong interests in 2HFY19 on its Vietnam projects and Gamuda Cove.

Maintain BUY with TP of RM3.35

BUY with SOP-derived TP of RM3.35. Its fundamental remains sounds, in our view, given its RM10.5bn orderbook and RM2.2bn unbilled property sales, which provide earnings visibility for 3-4 years. While recurring income on its highway concessions possess downside risk, we believe it would be safeguarded by the sanctity of contracts and minorities shareholders’ approvals for the disposal.

Source: BIMB Securities Research - 28 Mar 2019