Gamuda hosted an analyst briefing to provide an update on its good prospects to secure new projects. It is interested in bidding for the RM40bn Klang Valley MRT Line 3 (MRT3), RM55bn East Coast Rail Link (ECRL) and RM35-40bn KL-Singapore High Speed Rail (HSR) infrastructure works in Malaysia. We maintain our EPS forecasts assuming new contracts will only contribute in FY20E. We reaffirm our top BUY call on Gamuda as our preferred large-cap construction pick with an unchanged RNAV-based TP of RM5.86.

HSR Ambitions

Gamuda and Malaysian Resources Corp (MRC MK, RM1.06, HOLD) have formed a 50:50 joint venture to bid to be the Project Delivery Partner (PDP) for the HSR project. It estimates the infrastructure work is worth about RM35-40bn for the Malaysian portion. A key determinant for a successful bid is the PDP fee rate, which was based on 5.5-6.0% of project value for previous Malaysian infrastructure projects. Another bidder that expressed interest in the PDP role is the IJM Corp-Jalinan Rejang-Maltimur ResourcesSunway Construction consortium. We believe Gamuda is likely to win the bid as it has the most extensive PDP experience (first to implement a Malaysian project based on a PDP concept in 2012). This project will potentially double its current order book of RM16bn.

MRT3 Subcontract Interest

We gather that Gamuda has expressed interest to be a subcontractor of the RM40bn MRT3 project to potential bidders for the turnkey contract. It is likely that either the Japanese or Chinese contractors will be appointed the main contractor as they are highly competitive with potential backing of their respective governments to offer soft loans to finance the project. Gamuda has the competitive advantage to become a subcontractor given its strong track record (completed MRT1 and undertaking MRT2 currently), a fleet of 12 specialised tunnel-boring machines that can be refurbished to be used for MRT3 and soil/technical data to implement MRT projects in Klang Valley.

ECRL and Highway Potential

Gamuda is still negotiating with the main contractor China Communications Construction Co. for a subcontract package potentially worth RM6-8bn for the ECRL project. In addition, it is interested in bidding for the RM13bn Pan Boneo Highway Sabah new packages next year.

Bullish on New Contract Prospects

We remain bullish on Gamuda’s prospects to grow its order book while earnings visibility is underpinned by its high current order book: BUY. Key risks: losing bids for new contracts, project delays, delay in the sale of SPLASH.

Regional Expansion Opportunities

The Gamuda-Wai Fong Construction Joint Venture submitted the second lowest bid at S$83m among 14 bidders for the Civil Engineering Contract 715 of the MRT NEL Extension Tunnel Package in Singapore. But China State Construction Engineering Corp was awarded the contract for S$79m on 8 December 2017. Gamuda is making progress in its bidding process for overseas MRT projects, from the highest bidder previously to the second lowest bidder in the recent tender. The bid was submitted as part of its plan to cautiously expand its construction operation regionally.

Revised New Contract Targets

Gamuda has revised its new contract target to RM6-8bn p.a. in FY18-19 due to the change in tender requirements for the MRT3, and Gamuda will not take a lead role in the project. Some bids were also unsuccessful while contract awards for ECRL and PBH Sabah have been delayed. We are more conservative in our assumptions as we only assume Gamuda will secure RM15bn worth of new contracts in FY19-20E and see a maiden earnings contribution from the new contracts in FY20E (4% of PBT). Hence, there is potential upside to FY19E earnings if new contracts are secured earlier.

Encouraging Property Sales

Gamuda achieved pre-sales of RM903m (+110% yoy) in 1QFY18 and is on track to achieve its RM3.5bn pre-sales target in FY18. Unbilled sales of RM2.1bn at end-1QFY18 provide good earnings visibility. Domestic presales grew 20% yoy driven by sales for its Horizon Hills, Robertson and Gamuda Gardens projects. However, property profit margins remain under pressure due to project mix (skewed towards overseas projects) and high upfront costs for new domestic townships. Total GDV is about RM55bn for all its property development projects.

Source: Affin Hwang Research - 8 Dec 2017