News

• Receives 4 writs of summons. Gamuda announced that its 80% subsidiary, Gamuda Water has received 4 writs of summons totalling RM39.5m from Tenaga ( BUY , TP: RM17.50 ). The writs of summons are for (i) outstanding electricity bills up to end Jan 2018; (ii) interest on the outstanding sum at 5% p.a. calculated from end Jan 2018 to the date of settlement; and (iii) costs and other reliefs.

Comments

• The chain reaction. To recap, SPLASH (40% owned by Gamuda) has not been receiving its full quantum of billings from SYABAS (which is now owned by Air Selangor) since 2008. As a result, SPLASH’s payments to its O&M operators, namely Gamuda Water and Sg Harmoni (owned by Taliworks ( HOLD , TP: RM1.06 )) have also been below the billings.

• Hit by lower payments. We gather that SPLASH has further reduced its monthly payments to the O&M operators since mid-2016 from 60% of billings to 34%. As a result of the prolonged effect of this further reduction, the O&M operators faced difficulties in paying its electricity bills. Just last week, Sg Harmoni was also hit by the same summons. from Tenaga.

Risks

• Delays in resolving the Selangor water saga would mean that payments to SPLASH (and consequently the O&M operators) would be below the billed amounts (balance is recorded as receivables). This would make it difficult to cover operational costs (as evident from this recent summons from Tenaga) and maintenance on the water treatment plants.

Forecasts

• Earnings impact from the summons is expected to be minimal as the electricity bills have been expensed (and booked into the balance sheet as payables) as and when they are incurred. As such, we leave our forecast unchanged.

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

• Our SOP based TP of RM5.95 implies FY18-19 P/E of 18.5x and 16.6x, respectively.

Source: Hong Leong Investment Bank Research - 12 Mar 2018