• Gamuda’s 3QFY20 revenue and earnings fellsignificantly by 33% yoy and 77% yoy weighed by lower contribution from construction and property divisions
• Gamuda to report weaker FY20 attributed to slower property sales and minimum contribution from construction.
• After several delays, Gamuda via 60%-owned subsidiary, SRS Consortium signed the PDP agreement earlier, exceeding market expectations.
• We cut our forecast for FY20 and FY21 by 30% and 24% respectively.
• Maintain HOLD rating on Gamuda with lower TP of RM3.23 based on FY21 SOTP valuation

We spoke to management recently for some operational updates. The overall tone was rather neutral driven by the restart of key projects that are seeing progress rising back to pre-Covid level. Overall, we believe Gamuda has the financial wherewithal to ride out the construction downturn caused by the Covid-19 pandemic.

Covid-19 – a bitter pill

Gamuda’s 3QFY20 financial witnessed revenue and earnings dipped significantly by 33% yoy and 77% yoy respectively. The performance was largely weighed by lower contribution from construction and property divisions as both were impeded by the MCO impact. In addition, JV and associate levels were not spared too as their contribution dipped by 18% and 26% especially due to the drop in traffic volume.

Inevitable weaker 2HFY20.

As a result of MCO impact, we believe its unavoidable for Gamuda to report weaker FY20 performance. This is largely attributed to the slower property sales during the period while the construction division is expected to see minimal contribution given the stringent SOP being put in place for the company to adhere to. Contribution from associate and JV is expected to be weaker too, given the drop in traffic volume which has not fully recovered post-MCO.

PTMP is current hope for longer term

After years of delay, Gamuda, via 60% owned subsidiary, SRS Consortium signed the PDP agreement for the Penang Transport Master Plan (PTMP), exceeding market expectations due to the impact of recent change in government. SRS Consortium will provide the state with RM1.3b bridging loan to reclaim the first 800 acres of Island A.

Land reclaim to start

The involvement in PTMP will cost Gamuda RM780m (for 60% stake) and bring its net gearing up to 0.44x (from current 0.35x) which we still find manageable. Nonetheless, total funding required to fully reclaim 800 acres of Island A is RM2.5b – whereby SRS and Penang State will have to explore other options for the RM1.2b shortfall. We only expect repayment when the lands are up and monetized in 4-5 years’ time. We note that the fee of 5% - 5.75% will likely only be applied for works where SRS will be overseeing – and not works that they are executing.

Hopeful for revival of large infra projects

Post GE-14 which took place in 2018, Gamuda’s orderbook was reduced by around RM2bn as a result of the MRT2 cost reduction. As such, management is positive on the prospect of revival in large-scale infra projects as Gamuda expects to participate in the re-tender exercise in order to replenish its construction orderbook. So far on domestic front, Gamuda has only secured the PTMP through PDP role worth RM1.2bn, which is expected to carry a PDP margin of 5.5% to 5.75%. Gamuda also expect to re tender the MRT3 project, as well as the High-Speed Rail project. On overseas projects, Gamuda plans to tender for two highway projects in Australia (worth >RM2bn) and a marine related project in Taiwan (worth >RM1.5bn).

Update on toll disposal

Earlier talks that Gamuda was to conclude its toll disposal (RM2.36bn equity value for all 4 tolled highways) faded given the recent change in federal government. Although the new government has not made any statements to cancel the disposal, we believe the government will not proceed with the toll acquisition given the hefty price tag involved.

Property not spared

Given the Covid-19 impact, property sales activity remains challenging as some potential buyers have started to withdraw their bookings. As such, Gamuda has slashed theirsales target to RM2bn vs. RM4bn previously, citing the challenging property market will damper its sales for the rest of CY2020. Nevertheless, we understand that Gamuda is not keen to give higher rebate and discount to clear its inventory as this will affect their margins.

Financial forecast

Given the latest development surrounding Gamuda’s business, we tweaked our forecast for FY20 and FY21. Our new earnings forecast for FY20 and FY21 is now trimmed by 30% and 24% respectively. We have also introduced FY22 earnings of RM582m, a slight decline from our FY21 estimate of RM590m.

Valuation and recommendation

Maintain HOLD rating on Gamuda with lower TP of RM3.23 based on FY21 SOTP valuation. Our target price is based on 30% discount to SOTP and implies 12x PER. Nonetheless, we believe Gamuda will benefit from further announcement to revive the previously shelved infra projects, which could help boost its orderbook.

Source: BIMB Securities Research - 23 Jul 2020