News

Following the arbitration proceedings between MMCGamuda JV (50:50% stake) and Wayss & Freytag (M) S/B (WF), the arbitral tribunal has decided that: 1) The JV’s claim against WF has failed and is dismissed; 2) WF’s claim succeeds in substantial part and the JV shall pay WF RM96.3m together with interest thereon at 5% per annum from 16 Apr-13; and 3) The JV shall pay WF RM9m as costs.

Impact on Gamuda’s 50% JV stake on earnings is RM77.8m for FY13.

Highlights

Recap.... The 9.7km 40-year concession SMART tunnel project was formally awarded to MMC-Gamuda JV for RM1.93bn back in June-04 (the proposal was first approved in Jan-02). WF was subcontracted the tunnel boring contract to construct and complete the North Tunnel Drive portion on Apr-03, but was terminated due to progress delays on Jan- 06. Hence, the JV took over the North Drive tunnelling works while executing the South Drive portion.

Subsequently, on Dec-08/Jan-09, both parties filed claims against each other with the JV claiming RM161.2m against WF, while WF claiming RM153.8m against the JV. Although the Dispute Adjudication Board’s decision was for the JV to pay WF RM102.4m, the JV was advised by their solicitors that they have a good chance of succeeding before the arbitral tribunal.

Impact... The RM82.3m (RM77.8m + RM4.5m (RM9m adjusted for 50% stake)) compensation works out to ~4 sen/share (FD: ~3.5 sen/share) to Gamuda and represents 15% and 14.6% of FY12 and FY13E earnings respectively.

Balance sheet aspect, Gamuda has no problem forking out payment with cash balances of RM978m. Hence, net debt position will increase slightly to RM1.2bn with net gearing of 28.8% (we have not considered RM170m investment securities as part of cash).

Risks

Execution risk; Failure in securing new projects; Political and regulatory risk; Rising raw material prices; Unexpected downturn in the construction and property cycle; Sharp depreciation of the VND.

Forecasts

Unchanged as we consider the arbitration impact to earnings as non-core item.

Rating

HOLD

Although the compensation amount translates to only 1% of the current market cap of RM8.7bn, we are still taken aback by the disappointing outcome. The negative sentiment may see a kneejerk reaction to Gamuda’s share price which may prove to be a buying opportunity. Meanwhile we maintain our HOLD call on Gamuda given less than 10% upside from our current TP.

Valuation

• We are maintaining our TP at RM4.28 based on SOP valuation (see Figure #3) as we believe that this is a one-off non-recurring event.

Source: Hong Leong Investment Bank Research - 17 Apr 2013