Gamuda has received an offer from the Ministry of Finance (MOF) acquire its toll highway stakes for an equity value of RM2.36bn. The offer price is 16% below our DCF valuation of RM2.8bn, which is a negative surprise. However, we are neutral on the deal as we believe MOF’s market-driven approach reduces government policy risks for concession companies and augurs well for Gamuda to participate in future Public-Private Partnership (PPP) projects. We downgrade our call to HOLD from Buy with lifted RNAV-based target price (TP) of RM4.08 as the share price saw strong outperformance. Potential special dividend provides support.

Offer Price Below Our Estimate, But Within Management’s Valuation

Gamuda announced that it has received an offer from the Ministry of Finance (MOF) to acquire its toll highway stakes (44% of LITRAK, 52% of SPRINT, 70% of KESAS, 50% of SMART) for an equity value of RM2.36bn. The offer price is below our DCF valuation of RM2.8bn based on a WACC discount rate of 5.7-7.3% and at the low-end of market consensus range of RM2.3- 3.5bn. We were surprised by the low valuation of KESAS and SMART. However, we understand that the offer price is within Gamuda’s internal valuation and hence the offer will likely be accepted.

Earnings Cut

Assuming the offer is accepted by Gamuda and the deal is completed by the 31 December 2019 deadline, we cut our core EPS by 16-28% in FY20-21E, reflecting the loss in toll highway earnings contribution post-disposal, partly offset by interest income on the RM2.36bn cash proceeds (assume 4% p.a. interest rate). We gather that Gamuda could recognise an exceptional gain of over RM1bn from the disposal, which is not reflected in our FY20E EPS.

Downgrade to HOLD With Lifted TP of RM4.08

We expect Gamuda’s share price to see a consolidation in the short to medium-term following the 19% gain in share price (outperforming the FBM KLCI by 13%) over the past month. We revise down our RNAV/share estimate to RM4.08 from RM4.12 as the offer price is below our DCF valuation for the toll highway stakes, partly offset by higher valuation for its construction arm. We raise our TP to RM4.08 from RM3.70 previously assuming no discount to RNAV (10% discount to RNAV previously). We believe this is justified as Gamuda will monetise its concessions on completion of this deal and hence no holding company discount. HOLD.

Source: Affin Hwang Research - 24 Jun 2019