News

Gamuda will turn down Kumpulan Darul Ehsan Bhd’s (KDEB) offer for its 40% stake in Syarikat Pengeluar Air Selangor Holdings Bhd (SPLASH), as the latest equity offer dated 26 Feb-14 (kindly refer to our report entitled “Water Deal Materialises” dated 28 Feb-14) is valued the same at RM250.6m, as opposed to the expected equity valuation of RM1,834.6m.

Comments

Negotiation dry spell… It seems that the offer for SPLASH dated 26 Feb-14, following the Memorandum Of Understanding signed between the Federal and Selangor State Government to resolve the water issue is the same, whereby the offered sum of RM1,834.6m refers to the Enterprise Value of SPLASH and NOT the equity portion.

Rejection is better…. We are taken aback by the extremely low valuation for SPLASH, as the equity offer of RM250.6m makes up only less than 10% of SPLASH’s Net Asset Value of RM2.54bn (as of Dec-13).

Hence, if Gamuda were to accept the offer, it will only translate to proceeds of RM100.2m (~4 sen/share) and result in losses of approximately RM920m (~40 sen/share) for the company.

What’s next?… If indeed the Government were to use the Water Services Industry Act Section 114 to see through the acquisition of SPLASH, it will be akin to nationalising it and hamper investor confidence. We believe that a much more realistic offer based on Discounted Cash Flow will be negotiated instead.

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

Maintain Target Price of RM4.62 based on Sum-of-Parts valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 11 Mar 2014