Challenging Times

We believe Gamuda will face challenges to replenish its order book. Gamuda was pursuing the RM60bn Kuala Lumpur-Singapore High Speed Rail (HSR) and RM45bn Klang Valley MRT Line 3 (MRT3) projects, which have been cancelled by the new government. It now plans to revive discussions for the proposed RM8bn Penang LRT project. We cut EPS by 3-12% for FY18-20E to reflect lower revenue and profit margins for its construction and property divisions. We reiterate our HOLD call with a reduced RM3.50 TP, based on a higher 20% discount to RNAV.

Sustained by Large Order Book Despite Setbacks

Gamuda’s remaining order book of RM13.5bn (includes RM6.6bn for project delivery partner contract) will sustain construction activities over the next 3 years. This excludes MRCB Gamuda Consortium’s appointment as the Project Delivery Partner (PDP) for the northern section of the HSR project. This follows the suspension of negotiations on the PDP agreement with the government on 31 May 2018. We gather that the MMC Corp-GamudaGeorge Kent joint venture was a frontrunner for the MRT3 project before the project was cancelled recently.

Order Book Replenishment Risk

It is back to the drawing board for Gamuda following the cancellation of the HSR and MRT3 projects. Gamuda hopes to revive the MRT3 project, as the Circle Line will integrate the existing public rail services in Klang Valley. We gather that the estimated cost of RM45bn for the project could be reduced to RM20-22bn by scaling down the project. The Gamuda-led SRS Consortium (60% stake) remains the PDP for the RM32bn Penang Transport Master Plan (PTMP), which may be revived.

Earnings and Target Price Cut

We expect Gamuda to see slower progress billings on its remaining construction order book while its property projects continue to face weak market conditions. We cut EPS by 3-12% for FY18-20E to reflect these concerns. We revise down our fully-diluted RNAV/share estimate to RM4.38 from RM4.90 to reflect the lower construction and property division valuations. Applying a higher 20% discount to RNAV (from 10%) to reflect the heightened risks, we slash our TP to RM3.50 from RM4.42 previously.

Maintain HOLD

We reiterate our HOLD call as the current share price is at 10-year trough historical PER and Price/book valuations. However, any upward re-rating catalyst for Gamuda is limited amidst government policy risks.

Source: Affin Hwang Research - 5 Jun 2018