News

Gamuda has declined Kumpulan Darul Ehsan Bhd’s (KDEB) latest offer (announced on 22 Nov-13) for its 40% stake in Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH).

This is mainly due to the absence of payments for SPLASH’s surplus book value which has resulted in an approximately 90% reduction in valuation (from RM2.5bn to RM250.6m based on our estimates for 100% stake).

Moreover, the offer does not indicate whether Gamuda Water (80% stake) will continue on as the existing operations and maintenance operator for SPLASH.

Highlights

Rejection is good…. We are POSITIVE that Gamuda is unable to consider the offer and is willing to seek further clarification/negotiations with the Selangor State Government to reach an agreement.

Offer too low… If Gamuda were to accept KDEB’s offer of RM250.6m (equity offer), based on SPLASH’s FYE Mar-13 PAT of RM281.7m, it will translate to a P/E of less than 1x, with 16 years (ending Dec-29) and imminent tariff hikes left in the concession agreement. As a result, back-of-envelope calculation will slash our TP for Gamuda by 8.4% to RM4.13.

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.

Rating

HOLD

Although prospects for Gamuda remains bright from the rollout of the next MRT lines, we believe that much of the positive catalysts have already been factored in its share price. Given that the current price has exceeded our TP slightly, we maintain our HOLD call.

Valuation

Maintain TP of RM4.51 based on SOP valuation (see Figure #1). However, if the KESAS deal goes through our new TP for Gamuda is RM4.90.

Source: Hong Leong Investment Bank Research- 5 Dec 2013