• 3QFY19 core profits -14.6% yoy following the disposal of SPLASH but inched up 1.6% qoq on higher property progress billings and margin; 9MFY19 core profits were ahead at 83.5%
•  We view the offer of RM2.4bn to Gamuda for 4 intracity highways as reasonable and expect a smooth transaction. We reduce FY20- 21F estimates by 15-33% reflecting the earnings vacuum. 
• Management is upbeat on the construction segment with the revival of mega projects and overseas projects. Still, we are cautious on delays amid on-going fiscal consolidation. 
• Downgrade to HOLD with RM3.40 SOP-derived TP. The stock remains our sector favourite given its strong RM10bn orderbook, RM2.2bn unbilled sales and potential special dividend. Accumulate on dips.

Running ahead of estimates

3QFY19 core earnings declined -14.6% yoy due to earnings vacuum following the SPLASH disposal but inched up 1.6% qoq on higher progress billings which rose 8.9% qoq. It also saw better margins predominantly due to its overseas projects. Overall, 9MFY19 core earnings were ahead of ours and concensus FY19F estimates at 83.5% and 84.7%.

Lowered estimate on earnings vacuum FY20-21F

We understood that the RM2.4bn offer price to Gamuda for the 4 highway concessions is fixed, pending cabinet and shareholders’ approval. Given that offer price is reasonable, we expect transaction process to be smooth until its finalization by end 2019. We cut our FY20-21F estimate by 15%-33% to reflect earnings vacuum.

Cautious on the delays amidst improved sentiment

The management is upbeat on construction segment after the government revived the ECRL and Bandar Malaysia projects; the latter could lead to revival of the HSR project. It also expects to kick off the PTMP project from mid-2020 onwards which would underpin earnings going forward. Still, we are cautious on possible delays of domestic projects amidst the government's tightening fiscal position. To mitigate domestic risk, Gamuda is building up tender book for Australia to AUD15bn while actively seeking new jobs in Taiwan, Singapore and Vietnam.

Downgrade to HOLD with TP of RM3.40

Downgrade to HOLD with RM3.40 SOP-derived TP (from RM3.35). Despite the absence of recurring incomes, the stock still possesses sound fundamentals: a) outstanding orderbook is sizeable at RM10bn, and b) unbilled property sales amounts to RM2.2bn. In view of its growing cashpile, we believe a special dividend could be declared. Accumulate on dips

Source: BIMB Securities Research - 28 Jun 2019