News

• Underground works awarded. Yesterday, MRT Corp announced that it has awarded the underground works package for the Sg Buloh-Serdang-Putrajaya Line (MRT2) worth RM15.5bn to the MMC-Gamuda JV.
• Scope of works. This is the single largest package of the MRT2 involving the construction of tunnels, underground stations, portals and escape shafts. The underground works will span 13.5km from the Jln Ipoh North Escape Shaft to the Desa Waterpark South Portal over a period of 6 years.

Comments

• Award as expected but... This underground package award is within our expectation as we previously argued that the MMC-Gamuda JV has an upper hand in its bid given (i) cost advantage from the reuse of tunnel boring machines from MRT1 and (ii) superior understanding of the soil conditions, in particular karstic limestone, within KL. The JV managed to beat China based CREC and CCCC for the job as it had the best technical evaluation and lowest price.
• …upside surprise on value. At RM15.5bn, the contract sum is 29% higher than our initial estimate of RM12bn. The value on a per km basis works out to be RM1.15bn which is 31% higher than the underground portion for MRT1. We read this in a positive light that margins on the job should at least be maintained, if not enhanced. Management indicates that it managed to garner a PBT margin of 13% for the MRT1 underground works.
• More elevated packages. Earlier this week, 2 elevated packages worth RM1.4bn and RM1.2bn were awarded to AZRB (not-rated) and SunCon (BUY, TP: RM1.94). That leaves a remaining 8 elevated packages to be dished out progressively throughout the year. Management guides that on average, each elevated package is worth RM1bn. As the PDP, the JV earns a 6% fee on the elevated portion which we estimate to be worth RM14.5bn (i.e. total cost of RM30bn less underground portion of RM15.5bn).

Risk

• Arguably, risks associated with the MRT2 job should be lower given the execution experience garnered from MRT1.

Forecasts

• Despite the higher than expected contract sum, we only raise FY17-18 earnings by 1-3% (FY16 unchanged) as it is partially offset by (i) reduction in our assumption for the PDP portion and (ii) scaling back property sales target by 6-11% ahead of management’s eventual guidance cut.

Rating

• Maintain BUY, TP: RM5.65
• The MRT2 rollout paves way for Gamuda to scale another round of record earnings in FY17-18.

Valuation

• Our SOP based TP is raised from RM5.54 to RM5.65 following the earnings upgrade. This implies 23.8x FY16 P/E but a more palatable 19.5x and 17.7x in FY17-18 once the earnings momentum sets in.

Source: Hong Leong Investment Bank Research - 1 Apr 2016