Highlights

• No MRT3 PDP; funding required. Management confirmed that the MRT3 (RM40bn) will not apply the PDP model. Instead, a turnkey contractor will be appointed to undertake the job and fund it. Given the funding requirements, management feels that the turnkey role would likely go to foreign parties, possibly Chinese or Japanese.

• Not all is lost. While aborting the PDP model for MRT3 may be a slight setback for Gamuda, we reckon that not all is lost. As c.80% of its alignment will be underground, the PDP scope would have been limited to begin with as it applies only for the elevated portion. Management shared that MRT3 will have a mandated local content requirement in the range of 40-50%. We believe that Gamuda has a participating chance in the underground works via subcontracts given (i) cost advantage as its existing 12 tunnel boring machines for MRT2 can be redeployed for MRT3, (ii) it has experience with the MRT1 and MRT3 and (iii) it has done extensive soil condition research.

• Eyes on HSR PDP. Last month, Gamuda announced that it will form a 50:50 JV with MRCB to bid for the HSR PDP role. The PDP will be in charge of the civil and infra works (ex. systems and rolling stock) for the Malaysian stretch of the HSR, estimated to be worth RM35-40bn. Contenders for the PDP role must be led by locals. We reckon that the JV is in a strong position to win the role as both parties are one of the few contractors with PDP experience (MRT 1&2 for Gamuda and LRT3 for MRCB). Rail track record wise, Gamuda has MRT 1&2, Northern Double Track and Kaohsiung MRT while MRCB has LRT Ampang ext and MRT2 elevated viaduct. Tender for the HSR PDP will close end Jan with a possible award by mid-2018.

• Other job potential. Gamuda is still negotiating with CCCC for a package of the ECRL (RM6-7bn) with the devil being the pricing. It is also awaiting tenders for the Pan Borneo Highway Sabah to be called, likely in 2018. In Singapore, Gamuda has tendered for a small package of the MRT (c.SGD80m) where it is the 2 nd lowest bidder. While the job is rather small by Gamuda’s standards, its intention is to enhance its tunnelling experience by undertaking an MRT job in an international tender field.

Risks

• Non approval or delays for Penang Transport Masterplan.

Forecasts

• Unchanged. 1QFY18 results will be released on 15 Dec.

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 HSR, ECRL and MRT3.

Valuation

• Our SOP based TP of RM6.36 implies FY18-19 P/E of 19.4x and 16.6x respectively.

Source: Hong Leong Investment Bank Research - 11 Dec 2017