Lower Water Loss

As expected, Gamuda recognised the impairment loss for SPLASH and write down of receivables in Gamuda Water (GW). However, the net exceptional loss of RM304m incurred was lower than our estimate of RM452m. Core net profit of RM809m (+16% yoy) in FY18 was also 10% higher than our revised forecast of RM737m. We raise our net profit forecasts by 1-3% in FY19-20E to reflect higher construction and property earnings, which were above our expectations. We reiterate our HOLD call with lifted TP of RM3.46, based on 20% discount to RNAV.

Not as Bad as Expected

Net profit of RM514m (-15% yoy) in FY18 was below consensus forecast of RM789m but above our estimate of RM295m. We believe consensus earnings forecast did not include the impairment losses for SPLASH while the actual losses incurred were below our estimate. We understand that Gamuda made partial provisions for the GW receivables write-down and SPLASH impairment in past years.

Strong Core Earnings Growth

The higher progress billings for the Klang Valley MRT Line 2 (MRT2) project spurred construction PBT growth of 26% yoy in FY18. Meanwhile, strong property sales of RM3.6bn (above target of RM3.5bn) drove property earnings growth of 17% yoy. Concession core PBT declined 4% yoy in FY18 and was further dragged down by the SPLASH impairment. Overall core earnings grew strongly by 16% yoy in FY18.

High Order Book and Unbilled Sales

Gamuda’s outstanding order book of RM12bn (including MRT2 project delivery contract) and unbilled sales of RM2.3bn will sustain earnings in FY19-20E. However, the loss of earnings contribution from SPLASH following the proposed disposal and lower GW earnings will reduce concession earnings by about RM110m. We expect core EPS contraction of 14% yoy in FY19E (+15% yoy in FY18) and +7% yoy in FY20E. We introduce FY21E core EPS forecast of 29.4 sen (+12% yoy) with earnings growth driven by higher property and concession earnings.

Maintain HOLD

We maintain our HOLD call on a 12-month view as we believe the current core FY19E PER of 13x and Price/book of 1x are fair, close to one standard-deviation below mean levels. We lift our TP to RM3.46 from RM3.42 to reflect higher construction division valuation in our RNAV. Key upside/downside risks are higher/lower new contract procurement.

Source: Affin Hwang Research - 1 Oct 2018