News

Gamuda’s offer to acquire Permodalan Nasional Bhd’s (PNB) 20% stake in KESAS Highway has lapsed following the inability of PNB and Gamuda to execute a definitive agreement.

Gamuda will continue to pursue to acquire both PNB and Perbadanan Kemajuan Negeri Selangor’s (PKNS) 30%- stake in the highway upon the proposed acquisition of Amcorp Properties Bhd’s 20% stake becoming unconditional.

Comments

Unexpected development… As highlighted in our report “Sweetening KESAS offer” dated 24 Dec-13, we were expecting PNB to accept Gamuda’s higher revised offer of RM280m for its 20% stake (see Figure #1). Thus, we are slightly disappointed that negotiations have fallen through as the deal would have been both earnings and valuation accretive for the company.

Settle Amcorp first… We believe that Gamuda will now be focused on completing the acquisition of Amcorp’s 20% stake in the KESAS Highway before resuming negotiations for PNB and PKNS stake. Although Gamuda may eventually succeed in acquiring PNB’s stake, we do not foresee PKNS accepting Gamuda’s offer given the current political climate.

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

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 there is less than 10% total upside from our lower revised Target Price, we are maintaining our HOLD call.

Valuation

We cut our Sum-Of-Parts valuation for Gamuda by 2.3% to RM4.62 from RM4.73 previously due to the reduced stake in KESAS of 50% instead of 70% imputed previously. We believe that it may take longer than expected to successfully acquire PNB’s 20% stake in the highway (see Figure #2).

Source:Hong Leong Investment Bank Research- 11 Feb 2014