Gamuda’s 1HFY19 result was above market expectations but in line with ours. Net profit fell 17% yoy to RM345m with lower earnings for all divisions. Lower contract value and profit margin for Klang Valley MRT Line 2 (MRT2) and no contributions from SPLASH following the disposal of the associate dragged down group earnings. Negotiations to dispose its toll highway stakes are ongoing and are expected to complete by mid-2019; uncertainties will persist on pricing. We reiterate our HOLD call on Gamuda with TP of RM2.70, based on 30% discount to RNAV.

Lower Earnings

Gamuda reported 1HFY19 net profit of RM345m (-17% yoy), comprising 55% of market consensus forecast of RM631m and 52% of our estimate of RM663m. Revenue (including share of joint venture revenue) was flat yoy at RM3.48bn. The decline in earnings was mainly due to lower associates’ earnings (-23% yoy) following the disposal of its 40% stake in SPLASH at end-2018. Construction PBT (-18% yoy) was also weaker with PBT margin narrowing to 8.1% in 1HFY19 compared to 10.1% in 1HFY18. This follows the cut in MRT2 contract value to RM30.5bn from RM32bn, which reduces the profit margin for the remaining works for the project. Net profit was up 1% qoq but fell 18% yoy to RM173m in 2QFY19.

High Order Book and Unbilled Sales

Gamuda achieved property pre-sales of RM1.3bn (-31% yoy) in 1HFY19 with overseas projects accounting for 65% of total sales. It maintained target sales of RM4bn in FY19 on expectations of stronger performance for its Gamuda Cove and Vietnam projects. Gamuda Cove saw its maiden launch of double-storey terrace houses snapped up by buyers but was not recognised as pre-sales in 1HFY19 pending conversion of bookings to sales agreements. Its outstanding construction order book of RM10.5bn and unbilled property sales of RM2.2bn will sustain earnings in FY19-21E. Final approvals for its Penang Transport Master Plan project is expected by mid-2019 with initial contract awards likely by late-2020.

Maintain HOLD

Current FY19E PER of 11x is undemanding compared to historical mean of 15x. But uncertainty on the ongoing negotiations to dispose its stakes in 4 toll highways to the government could dampen sentiment on the stock. The completion of the sale of its SPLASH stake to the government could see another slight delay from the current deadline of 31 March 2019 due to procedural requirements. We reiterate our HOLD call with unchanged TP of RM2.70, based on 30% discount to RNAV.

Source: Affin Hwang Research - 28 Mar 2019