Gamuda’s 1QFY19 net profit of RM172m came in within expectations, accounting for 26-27% of consensus and our estimates. Net profit fell 16% yoy mainly due to absence of SPLASH’s earnings contribution following the disposal of its 40% stake. The group PBT margin contracted by 1.5ppts yoy due to lower margin from the construction and concession segments. We believe core earnings are sustainable for FY19-21E given Gamuda’s healthy order book and large unbilled sales. We upgrade our call to BUY from Hold with an unchanged 12-month TP of RM2.70 following the sharp correction in share price.

Within Expectation

Gamuda’s net profit of RM172m (-16% yoy) in 1QFY19 comprise 26-27% of consensus and our FY19E forecasts of RM640-663m. Net profit decreased 16% yoy mainly due to the absence of SPLASH’s earnings contribution following the disposal of its 40% stake in 4QFY18. Sequentially, core net profit fell 16% qoq to RM172m for the same reason. Revenue fell 15% in 1QFY19 with lower revenue from its property development (-64% qoq) and concession segments (-1% qoq), partially offset by higher construction revenue (+49% qoq). Notably, the group declared DPS of 6 sen for the 1QFY19 (1QFY18: 6 sen). We believe core EPS will be lower in FY19E (-13% yoy) given the absence of SPLASH contribution, but sequential earnings should improve on better overseas property sales and pick up in construction activities.

Sustainable Earnings

Gamuda’s outstanding order book of RM11.8bn (including the revised MRT2 contract and new contracts won of RM0.9bn) and unbilled property sales of RM2.3bn will sustain earnings in FY19-21E. Property sales in FY19E is targeted to reach RM4bn supported by the launch of Gamuda Cove coupled with strong sales from its projects in Ho Chi Minh and Hanoi, Vietnam.

Upgrade to BUY

We upgrade our call to BUY from Hold with an unchanged TP of RM2.70 on a 12-month as we believe the current core FY19E PER of 9x and Price/book of 0.7x, at historical low levels, and net yield of 5.3% are attractive. Key downside risk is lower new contract procurement and prolonged property downturn.

Pursuing overseas and Penang infrastructure projects

Gamuda has started to pursue overseas metro and railway projects especially in Singapore, Taiwan and Australia to mitigate the delays in project roll outs in the domestic market. The RM32bn Penang Transport Master Plan (PTMP) is progressing well as Gamuda expects to sign the PDP contract with the state government and receive approvals from the federal government by April 2019, while civil work packages are targeted to be awarded by end-2019.

Proposed 1:4 Rights Issue and Dividend Reinvestment Plan

Gamuda has proposed a rights issue on the basis of 1 warrant for 4 existing Gamuda shares. Based on issue price of RM0.25 per warrant, the total gross proceeds expected to be raised is in the range of RM154m- 190m. The proceeds will be utilised mainly to fund for the Gamuda Cove project and working capital for its existing construction projects including MRT2 and Pan Borneo Highway. The issuance of new Warrant F under the minimum scenario will reduce Gamuda’s net gearing to 0.51x from 0.54x. Based on indicative exercise price of RM2.31 for Warrant F, the full exercise of warrants will reduce net gearing to 0.28x.

In addition, Gamuda proposed a dividend reinvestment plan (DRP) to allow shareholders to reinvest their dividends in new shares to be issued. The rationale for the proposed new warrants and DRP is to raise capital for its working capital and project financing purpose. We recommend subscribing for the warrants as the issue price has been fixed at RM0.25, which represents a 34% discount to the Trinomial model. Typically, Gamuda sets a low exercise price to attract shareholders to exercise the warrants closer to the expiry date to raise cash for future expansion.

Source: Affin Hwang Research - 17 Dec 2018