Gamuda’s FY17 headline net profit of RM602m (-8% yoy) was below market and our expectations. We were surprised by the RM98.5m impairment for its SMART toll road concession in 4QFY17. Core net profit of RM697m (+10% yoy) was in line with our expectation. We lift our FY17-18E fully-diluted EPS forecasts by 5% to reflect higher property sales with more aggressive new launches. Gamuda remains our top large-cap construction BUY with a reduced RNAV-based TP of RM5.86.

FY17 Results - Below Expectations

Headline FY17 net profit of RM602m was 12-13% below consensus and our forecasts of RM684-691m. Gamuda made a one-off asset impairment for its SMART toll road concession due to reduced traffic volume forecasts. Revenue (before FRS11 adjustment) jumped 37% yoy to RM5.7bn, driven by higher revenue for all segments: construction (+37% yoy), property (+67% yoy) and concessions (+6% yoy). Core PBT grew 5% yoy RM987m on the back of higher core PBT for construction (+42% yoy), property (+9% yoy) and concessions (+7% yoy). PBT margin improved to 9.3% (+0.8 ppt) for its construction division but fell to 12.9% (-6.8 ppt) for its property arm.

Higher Target Property Sales

Gamuda achieved record high property sales of RM2.38bn (+14% yoy) in FY17 with the successful launch of its new Gamuda Gardens township project and higher sales for most of its ongoing projects in Malaysia. Overall property sales in Malaysia jumped 98% yoy to RM1.03bn, while overseas sales declined 12% yoy to RM1.35bn due to lower sales in Singapore. Gamuda has set higher target sales of RM3.5bn for FY18 and RM4bn for FY19 with more aggressive launches planned for Malaysia and overseas markets.

Dimmed Prospects for Construction Contracts

After the close of the tender for the LRT Line 3 underground package worth over RM1bn, we understand that the award has been suspended as the design is being reviewed. Gamuda’s competitive advantage could be reduced if the design is changed from a deep tunnel design using tunnel boring machines to using a cut and fill method for a shallow tunnel or building elevated viaducts. It is still negotiating for the remaining direct subcontract package for the East Coast Rail Link (ECRL) project from China Communications Construction Co (CCCC).

Maintain BUY. Top Large-cap Pick

We trim our RNAV-based target price to RM5.86 from RM5.94 after reducing our DCF valuations for SMART to reflect the lower traffic volume forecasts.

Last Remaining ECRL Subcontract Package

All 8-9 subcontract packages for the East Coast Rail Link (ECRL) project has been awarded to China-based contractors except for one remaining package. Gamuda hopes to secure the remaining package to achieve its RM10bn target new contracts in FY18. But the contract value could be lower if other Malaysian contractors have to share the remaining package. There is also the possibility that other Malaysian contractors are awarded subcontracts by the Chinese subcontractors that won the other 7-8 packages and Gamuda is awarded the remaining direct subcontract from CCCC.

Protracted Negotiation for Sale of SPLASH

An amended proposal came up during the three-way negotiation between the federal government, Selangor state government and the owners of SPLASH (Gamuda holds a 40% stake). Gamuda is still hopeful for a resolution to sell its stake in SPLASH before the 5th October deadline. However, there is a risk that the deadline is extended further if the parties cannot reach an agreement.

Higher Property Sales Assumptions

We lift our EPS forecasts by 5% for FY18-19E to reflect higher property sales assumptions: RM2.8bn for FY18E and RM3.17bn for FY19E (previous forecasts of RM2.26bn and RM2.72bn respectively).

Key Risks

Project delays, protracted negotiations for the sale of SPLASH and losing bids for new contracts.

Source: Affin Hwang Research - 29 Sept 2017