Sustained Growth

Gamuda’s 9MFY17 result made up 71% of our previous FY17E forecast. Net profit growth accelerated to 5% yoy to RM499m in 9MFY17 (+2% yoy in 1HFY17). Higher PBT for construction (+64% yoy) and concessions (+3% yoy) was partly offset by lower property earnings (-18%). We cut our earnings forecasts by 5-6% to reflect lower property earnings and higher tax rates. Gamuda is targeting to secure RM10bn new contracts in CY17. Reiterate BUY with higher RNAV-based target price of RM5.94.

Below Expectations

Net profit of RM499m in 9MFY17 comprised 71% of consensus and our previous full-year forecasts of RM699-703m. We expect sustained earnings growth in 4QFY17, driven by progress billings on its large order book of RM16bn (RM8.2bn for main contractor works) and unbilled sales of about RM2bn. Revenue (including share of joint ventures) jumped 30% yoy to RM4bn in 9MFY17 due to higher progress billings on its MRT Line 1 and 2 projects. Pre-tax profit grew 11% yoy to RM696m in 9MFY17 but the higher tax rate led to slower core net profit growth of 3% yoy to RM489m.

Strong Property Sales

Gamuda achieved property sales of RM620m in 3QFY17, lifting total sales to RM1.4bn in 9M17. It will likely surpass its sales target of RM2.12bn in CY17 following the successful launch of its new Gamuda Gardens and Kundang Estates township projects in Malaysia, while sales remain strong for its overseas projects. But the higher costs in launching the new Malaysian projects and lower profit margin for its projects in Singapore led to lower property earnings (-18% yoy) in 9MFY17.

Higher New Contract Target

We gather that Gamuda lost its bid for the Gemas-Johor Bahru Double Tracking project. But it plans to bid for the LRT Line 3 (underground stretch) and Pan Borneo Highway Sabah projects. Meanwhile, Gamuda is negotiating for subcontract works for the East Coast Rail Link project from main contractor China Communications Construction Co. and plans to bid for the KLSingapore High-Speed Rail project. It has raised its new contract target to RM10bn from RM3-4bn in CY17.

Top Large-cap BUY

We raise our RNAV-based target price to RM5.94 from RM5.70 after rolling forward the base year for our DCF valuations to FY18E. Gamuda remains a large-cap core holding for exposure to the construction sector. Maintain BUY. Key risks: project delays, protracted negotiations for the sale of SPLASH and losing bids for new contracts.

Source: Affin Hwang Research - 28 Jun 2017