Results

• Gamuda posted 1QFY18 (FYE: July) results with revenue coming in at RM771.8m (-24% QoQ, +53Y% YoY) and core earnings of RM203m (+98% QoQ, +25% YoY).

Deviation

• 1QFY18 core earnings made up 26% ours and consensus full year forecast which is within expectations.

Dividends

• 6 sen DPS interim (unchanged YoY)

W Highlights

• Progressing well. The MRT2 (RM32bn) is progressing well with 97% of the work packages already awarded. Overall progress on the PDP scope is at 13.3% while the underground works is 19.5% complete. The first tunnel boring machine has been delivered to site and the first tunnel drive is expected to launch in Feb 2018.
• 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 MRT2; 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 two 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.

Risks

• Lower-than-expected orderbook replenishment.

Forecasts

• Unchanged as the results were inline. Rating Maintain BUY, TP: RM5.95
• 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

• While our forecast is unchanged, we lower our SOP based TP from RM6.36 to RM5.95 after ascribing a lower construction P/E target from 20x to 18x in view of the heightened bidding competition from foreign contractors.

Source: Hong Leong Investment Bank Research - 18 Dec 2017