News

Gamuda has made an offer to Perbadanan Kemajuan Negeri Selangor (PKNS), Permodalan Nasional Bhd (PNB) and Amcorp Properties Bhd to acquire the remaining 70% stake it does not own in KESAS Highway for RM875m (see Figure #1). The offer is valid until 18th Nov-13.

Highlights

Good move…. We are POSITIVE on Gamuda’s proposal to buy up the remaining stake in KESAS. Based on the offered valuation, this translates to a historical P/E of 7.8x (see Figure #2 for KESAS historical earnings). Our internal valuation for KESAS is higher by 6% at RM928.7m (based on 70% stake).

The deal will immediately be earnings accretive for Gamuda and also timely to mitigate the potential loss of earnings from SPLASH following the imminent disposal to the Selangor State Government. It is also a better investment than land banking exercise given the cautious mood in the property sector post 2014 Budget.

About KESAS… The 34.5km dual 3-lane carriageway was constructed in 1994 and opened to traffic on Dec-96. KESAS has an Average Daily Traffic (ADT) of 290k vehicles. The concession agreement is valid until 18 Aug-23 but may be extended by another 5 years to compensate for the lower tariffs (kindly refer to our report “KESAS reduces toll rates” dated 15 Jan-13). As of FYE Mar-13, KESAS is in a net debt position of RM252.7m and net gearing of 37.6%.

Financial impact… As of FY13, Gamuda has a cash position (including marketable securities) of RM1.75bn and total borrowings of RM2.46bn. With this acquisition, its net debt will rise to RM1.59bn with net gearing rising to 33% from 15%.

Meanwhile, additional earnings contribution from the 70% stake in KESAS should see us raising our FY14/FY15 earnings estimates by 12%/15% to RM727m/RM826m respectively. Hence, FY14/FY15 P/E is expected to reduce to 15.3x/13.5x from 17.1x/15.5x based on the current price.

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, pending conclusion of the deal.

Rating

HOLD

Despite this positive development, we are maintaining our HOLD call as much of the positive catalysts have already been factored in its share price. We believe that PKNS, PNB and Amcorp will ask Gamuda for a revise and higher offer for their respective stakes in KESAS.

Valuation

Maintain TP of RM4.51 based on SOP valuation (see Figure #4). However, if the deal goes through our new TP for Gamuda is RM4.90.

Source:Hong Leong Investment Bank Research - 6 Nov 2013