Results

• Gamuda reported 2QFY16 results with revenue of RM527m (-19% YoY, +3% QoQ) and earnings of RM160m (-12% YoY, -1% QoQ). This brings cumulative 1H earnings to RM321m, down -13% YoY.

Deviation

• 1Q earnings made up 56% of our full year forecast (51% of consensus) which we deem inline. Earnings in 2H could weaken slightly due to timing differences between the completion of MRT1 and the commencement of MRT2.

Dividends

• None declared during the quarter.

Highlights W

• Tunnelling award anytime now... Management hints that the tunnelling contract for MRT2 could be awarded within the next 2 weeks. The underground portion for MRT2 will span 13.5km, 42% longer than that of MRT1. As a result, the contract sum will be higher at an estimated RM12bn (MRT1: RM8bn). We gather that the MMC-Gamuda JV along with 3 foreign consortiums are contending for the job. In our view, the JV is in a polar positon to bag the tunnelling works given (i) cost advantage from the reuse of tunnel boring machines from MRT1 and (ii) 7.5% pricing advantage accorded (being pure local and Bumiputra status) under the Swiss Challenge.

• ...and elevated packages before mid-year. As for the elevated portion where the JV will be undertaking the PDP role, there will be a total of 10 packages to be awarded (c. RM1bn each). Management guides that 2 packages are currently being tendered and the results should be out before mid-year. We estimate the PDP scope to be in the tune of RM16-18bn whereby the JV will earn a 6% fee.

• Downside to property sales targets. Property sales remained weak with 1H numbers at RM385m (-28% YoY). Unbilled sales of RM1bn imply 0.9x cover on FY15 property related topline. Management cautions on a 20-30% cut in its sales target. At a 20% cut, this would bring it inline with our assumption of RM1bn for FY16.

Risks

• Weak property sales could partially offset the expected recovery in construction earnings.

Forecasts

• We raise FY17-18 earnings by 3-4% due to slightly faster than anticipated rollout of the MRT2 tunnelling works.

Rating

• Maintain BUY, TP: RM5.54
• Maintain BUY rating as the imminent roll out of the MRT2 should shore up interest in the stock.

Valuation

• Apart from our earnings upgrade, we roll forward our valuation horizon from CY16 to CY17 (i.e. FY17-18). We believe this to be a more relevant horizon as it better reflects contribution from the MRT2 which is the main investment thesis that Gamuda centres upon. Our SOP based TP is raised from RM4.85 to RM5.54, implying FY16-17 P/E of 23x and 19x respectively.

Source: Hong Leong Investment Bank Research - 25 Mar 2016