The RM20bn Klang Valley MRT Line 3 (MRT3) and RM32bn Penang Transport Master Plan (PTMP) projects could be revived. We gather that Gamuda is proposing to reduce the cost of the MRT3 by at least half from the previous estimate of RM45bn, while the PTMP is pending approval by the federal government authorities. We raise our RNAV/share estimate by 7% to RM4.12 on a higher construction division valuation. We upgrade our call to BUY from Hold with a higher TP of RM3.70, based on a 10% discount to RNAV, as we expect Gamuda to benefit from these project revivals.

Potential Revival of MRT3 Project at Lower Cost

We understand that Gamuda is proposing to reduce the cost of the MRT3 project by at least half of the previous RM45bn estimate to RM20-23bn. We gather that the government may revive the project by end-2019 and call for tenders to appoint a turnkey contractor in 2020. We believe Gamuda has competitive cost advantages to bid for MRT3 as it has 12 tunnel-boring machines (TBM) for MRT2 works that can be re-deployed for MRT3.

PTMP Project Is Making Progress

The PTMP and Penang South Reclamation (PSR) was included in the Penang Structure Plan 2030 and approved by the National Physical Planning Council recently. The final approvals required, such as the Department of Environment approval for the PSR project, are expected by mid-2019. Tenders for the initial packages of the proposed Penang Light Rail Transit (LRT) and Pan Island Link 1 (PIL1) will likely be called by late- 2020. Gamuda’s current order book of RM10.9bn could increase nearly three-fold if both the PTMP and MRT3 projects are secured.

Upgrade to BUY With RM3.70 Target Price

Uncertainties remain over the ongoing negotiations between Gamuda and the government to dispose of the former’s tolled highway stakes. We revise the value of its tolled highway stakes to RM2.8bn from RM4.8bn previously to reflect the higher net debt and lower traffic volume projections. We believe Gamuda will receive a fair price for its tolled highway stakes based on our DCF valuation. After rolling forward the DCF valuation base year to FY20E and raising the valuation of its construction and property divisions, our RNAV/share estimate increases to RM4.12 from RM3.86 previously. Based on a lower RNAV discount of 10% (30% previously), we raise our TP to RM3.70 from RM2.70. We upgrade our call to BUY from Hold.

Source: Affin Hwang Research - 9 May 2019