The government announced that it is negotiating with Gamuda to takeover the 4 tolled highways that the latter controls. Based on our DCF valuation, its stake in the 4 toll highways is worth RM4.78bn or RM1.94/share. Gamuda’s share price is expected to consolidate at current levels due to uncertainties on a deal. We expect the price to be offered by the government to be NPV neutral to preserve the sanctity of government contracts. Following the share price outperformance, we downgrade our call on Gamuda to HOLD from Buy with an unchanged target price of RM2.70, based on 30% discount to RNAV.

Monetise Concession Assets

The potential sale of the tolled highway stakes will monetise 50% of Gamuda’s RNAV of RM3.86/share based on our estimate, equivalent to 64% of its current market capitalisation. The attractiveness of the deal will depend on the price offered by the government. The proposed sale of SPLASH will increase the potential monetisation to RM5.64bn or RM2.28/share, which is equivalent to 59% of RNAV or 75% of current market capitalisation. Gamuda could utilise the potential cash proceeds to finance its Penang Transport Master Plan project and/or pay special dividends.

Expect Fair Treatment

The attractiveness of the deal will depend on the price offered by the government. We expect the price offered for Gamuda’s stakes in the concessions to be NPV neutral. We believe the fair treatment of concessionaires will preserve the sanctity of government’s contracts and will not adversely impact the equity and debt capital markets. But the negotiations could be protracted given the complexity of concession agreements and the government will have to source for funding to takeover the concessions.

Downgrade to HOLD

We downgrade our call on Gamuda to HOLD from Buy following the share price outperformance with an unchanged target price of RM2.70, based on 30% discount to RNAV. The uncertainties on negotiations to dispose its stakes in the tolled highway concessions could lead to a share price consolidation. The key risk to our call is a favourable deal that will lead to the narrowing of the share price discount to RNAV with monetisation of its concession assets.

Source: Affin Hwang Research - 25 Feb 2019