FY18 Preview: Water Loss

We expect Gamuda to report weak FY18 results, which are scheduled to be announced on 28 September 2018. We look for exceptional losses of RM452m on the sale of SPLASH to the Selangor state government (SSG) and write down of receivables for Gamuda Water (GW) to be recognised in 4Q FY18. We gather that the MRT Line 2 (MRT2) project cost could be reduced by 20-25% from the current estimate of RM32bn, prompting us to cut core our EPS by 8-12% in FY18-20E. We maintain our HOLD call on Gamuda and trim our TP to RM3.42, based on 20% discount to RNAV.

Weak Result Expected

We understand that Gamuda plans to recognize exceptional losses from the SPLASH and GW deals in 4Q FY18 if the external auditor can agree on the timing and amount to be recognized. We estimate an exceptional loss of RM452m, which lowers net profit to RM295m (-51% yoy) in FY18E. We note the exceptional loss is non-cash in nature, while the agreed cash proceeds of RM1.65bn from the deals are set to boost its cash flow.

Potential Reduction in MRT2 Contract Value

We understand that the federal government plans to change the current Project Delivery Partner (PDP) contracts for the LRT Line 3 and MRT2 (above-ground section) projects to turnkey contracts. The government is also reviewing the projects to reduce costs. We gather that the cost of MRT2 could be cut 20-25% to RM24.0-25.6bn by reducing the scope of works and the number of stations. The contract value is expected to be a fixed lump sum, ie, the main contractor is to bear any cost overrun.

Revising Down Our Earnings and RNAV

We cut core EPS by 8-12% in FY18-20E assuming the MRT2 project value is reduced to RM24bn from RM32bn. We cut our fully-diluted RNAV/share estimate to RM4.32 from RM4.43 to reflect lower valuation for its construction division, partly offset by higher valuation for its water assets based on the deal struck with SSG.

Maintain HOLD

We expect short-term price weakness for Gamuda as the upcoming FY18 result could be disappointing. We maintain our HOLD call on a 12-month view as we believe the current core FY19E PER of 13x and Price/book of 1.1x are fair, close to one standard-deviation below mean levels.

Exceptional Losses on Water Asset Restructuring

We expect Gamuda to recognize a net exceptional loss of RM396m on the sale of its 40% stake in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) to state-owned Pengurusan Air Selangor Sdn Bhd for RM1.02bn. This is based on the agreed price of RM2.55bn for 100% of SPLASH, representing a 28% discount to book value of RM3.54bn. Its 80%-owned Gamuda Water (GW) will take a 10% haircut on RM700m receivables due from Air Selangor under the deal. We estimate Gamuda’s share of receivables write-down is RM56m.

Higher Valuation for Water Assets Based on the Deal…

However, we raise the valuation of its water assets to RM1.34bn (RM0.86bn for SPLASH and RM0.48bn for GW), from RM1.08bn in our RNAV estimate for Gamuda. Our new valuation is based on SSG’s offer price for SPLASH (staggered payments over 10 years discounted at a WACC of 8.8%) and DCF valuation at a WACC of 8.8% for GW based on the revised Operations and Maintenance Agreement (OMA), including the RM630m repayment of receivables over 10 years. The higher valuation for its water assets adds RM0.26bn or RM0.09/share to our fully-diluted RNAV/share.

…but Offset by Lower Valuation for Its Construction Division

We understand that the federal government is looking to reduce the cost of the MRT2 by 20-25% to RM24.0-25.6bn from the current estimate of RM32bn currently. This project contributes 95% of its current outstanding order book of RM12.5bn (including PDP contract for MRT2). We reduce our sustainable earnings assumption for the valuation of its construction division to RM170m from RM220m. Based on the same construction PER of 14x, we reduce the valuation of the construction arm to RM2.38bn, from RM3.08bn previously.

Higher Project Value for Penang Project…

The Penang state government’s push to implement the Penang Transport Master Plan (PTMP) augurs well Gamuda, in our view. The SRS Consortium led by Gamuda (holds a 60% stake in the consortium) remains the PDP for the project. Gamuda hopes to obtain the Ministry of Transport and Department of Environment’s approval for the project by end-2018. As

the state and federal government are now controlled by Pakatan Harapan post-election, we believe the project is likely to be approved.

…raises Our DCF Valuation for PTMP

We gather that the project value is estimated at RM32bn, with a RM16bn cost for the infrastructure component and RM16bn for the land reclamation component. This is higher than our previous estimate of RM21.4bn. Hence, we raise our DCF valuation for PTMP to RM461m from RM298m previously in our RNAV estimate to reflect the higher project value.

Partial Federal Funding for PTMP?

It is still uncertain if the infrastructure component will be fully funded by the sale of reclaimed land or partially funded by the federal government. It was reported in The New Straits Times that the Chief Minister of Penang will consider requesting for a RM1bn soft loan from the federal government to accelerate the implementation of the PTMP by constructing the Pan-Island Link highway and Light Rail Transit linking George Town to Bayan Lepas International Airport concurrently. The proceeds from the sale of SPLASH and repayment of GW receivables totaling RM1.65bn (RM0.83bn upfront and RM0.82bn over 9 years) will be retained by Gamuda (unlikely to be distributed as special dividends) to support the PTMP project.

Lowering Our RNAV/share and TP; Maintaining Our HOLD Call

The changes in valuations for the water assets, construction division and PTMP project effectively lower our fully-diluted RNAV/share for Gamuda to RM4.32, from RM4.43 previously. Based on the same 20% discount to RNAV, we trim our 12-month TP to RM3.42 from RM3.50 for Gamuda. We expect some short-term share-price weakness for Gamuda as the upcoming FY18 result could be disappointing. We maintain our HOLD call on a 12-month view as we believe current core FY19E PER of 13x and Price/book of 1.1x are fair, close to one standard-deviation below mean levels and the construction sector peer average.

Source: Affin Hwang Research - 19 Sept 2018