Highlights

• Orderbook boost on the cards. Gamuda’s orderbook stands at RM16bn (including MRT2 PDP), implying a strong cover of 6.6x on FY16 construction revenue (including JV). Management is hopeful to add at least another RM10bn to its bag over the next 1-2 years. Key jobs eyed on include the East Coast Rail Link (ECRL), MRT3, High Speed Rail (HSR) and Pan Borneo Sabah.
• ECRL first… Public display of the mammoth 600km ECRL (RM55bn) ended in June with initial awards expected in 4Q17. Although China Communications Construction Co (CCCC) is the lead contractor, we gather that as much as 30-40% (RM16-22bn) of the works would be subcontracted to locals. Management guides that it is eyeing on a sizable portion of these subcontracts and will leverage on its track record with the Northern Double Track.
• …then MRT3. Project details on the MRT3 (i.e. Circle Line) is being finalised by SPAD. Cabinet approval is anticipated by mid-2018 with project rollout in early-2019. MRT3 will integrate with other radial rail lines via its orbital alignment, commonly known as the “wheel and spokes” concept. As it will pass through densely populated areas with high buildings, more than 50% of its alignment will be underground. This plays in Gamuda’s favour as it can undertake a higher degree of underground works given its experience with MRT1 and MRT2. Preliminary estimates place the MRT3’s cost at RM40bn.
• Post-election play. Our house view is for the 14th General Elections to be held in March 2018. We view Gamuda as a potential post-election play as approval for the Penang Transport Masterplan (PTMP) and disposal of SPLASH is likely to materialise after the polls. The former would provide another strong boost to orderbook while the latter would infuse Gamuda with RM1.2bn of cash (RM0.49/share).
• Sales scale new highs. Management is confident that it can surpass its FY17 property sales target of RM2.1bn (9MFY17: RM1.4bn). For FY18, this could potentially hit a new high of RM3bn driven by the launch of new townships such as Gamuda Gardens and Kundang Estates.

Risks

• Non approval or delays for Penang Transport Masterplan.

Forecasts

• FY18-19 earnings raised by 2% and 6% respectively after imputing higher property sales (FY17 unchanged). Rating Maintain BUY, TP: RM6.36
• Gamuda’s earnings upcycle is poised to hit another round of multi-year highs in FY18 and FY19. It is also a key play to ride on the upcoming mega rail projects such as the ECRL and MRT3.

Valuation

• Following our earnings upgrade, our TP is raised from RM6.24 to RM6.36, implying FY18-19 P/E of 19.4x and 16.5x respectively.

Source: Hong Leong Investment Bank Research - 02 Aug 2017