Gamuda’s Managing Director Datuk Lin Yun Ling said the support of the Penang residents is crucial for the successful implementation of the RM27bn Penang Transport Master Plan (PTMP). A due process exercise will take six months to complete, which involves impact studies on the environmental and social aspects of the plan. This has commenced with the appointment of an independent consultant by the Penang state government.

For 2015, Gamuda invested RM4.5bn in its property development and related infrastructure projects in Malaysia, Vietnam, Singapore and Melbourne, Australia. It will probably invest another RM3bn in capital expenditure (capex) in 2016. On the negotiation to sell its 40%-owned Splash to the Selangor state government, Gamuda is expecting an offer at its book value of RM3bn. A gearing of about 0.7x is comfortable according to management.

Comment: The outcome of the due process is needed to gain the federal government’s approval and the Penang public support for the PTMP. We believe it will take some time for Gamuda to receive all the approvals for the project. We have not factored in any contribution from PTMP in our earnings forecasts given the uncertainties. We have factored in an estimated DCF value of RM0.12/share for the project delivery partner fee on the PTMP in our RNAV-based target price of RM5.84.

The PTMP improves Gamuda’s prospects to grow its order book in the long run. The planned capex of RM3bn for FY16 is higher than our forecast of RM1.2bn. We expect net gearing to increase from 44% in FY15 to 57% in FY16E currently. Incurring a higher capex of RM3bn could see gearing hitting 102% in FY16, which is a concern. However, if Gamuda is successful in getting a valuation of RM3bn for Splash and it receives RM1.2bn for its 40% stake, this will reduce gearing to 84% even with the higher capex. Maintain BUY.

Source: Affin Hwang Capital Research - 8 Dec 2015