Gamuda’s 9MFY19 result was above market and our expectations, mainly due to higher-than-expected profit margins for its construction and property divisions. Net profit fell 18% yoy to RM521m in 9MFY19 due to lower construction and concession earnings. We lift our core EPS by 5-12% in FY19-21E to reflect higher profit margins for both divisions. The Board of Directors has resolved to vote in favour of accepting the Ministry of Finance’s offer to acquire Gamuda’s toll highway stakes for RM2.36bn. We reiterate our HOLD call with RNAV-based TP of RM4.08.

Positive Surprise

Gamuda’s 9MFY19 net profit of RM521m comprised 85% of full-year consensus net profit forecast of RM615m and 77% of our previous estimate of RM667m. We were surprised by the higher construction and property PBT margins. Revenue declined 1% yoy to RM5.2bn in 9MFY19, mainly due to lower property revenue (-5% yoy) while revenue for its construction (+1% yoy) and concessions (+2% yoy) grew marginally in 9MFY19. PBT fell 14% yoy to RM733m, mainly due to lower construction (-15% yoy) and concessions (-19% yoy) earnings, while property earnings grew 13% yoy.

Expand Overseas While Pursuing Local Projects

During the analyst briefing, the management highlighted plans to expand Gamuda’s construction operation overseas and has established a branch office in Australia with 60 staff to participate in tenders for infrastructure projects with expected tender submissions worth A$15bn. Gamuda is targeting to secure A$2bn worth of new contracts with local partners. Gamuda is also optimistic of securing long-term financing from the federal government and Asian Development Bank to fund the Penang Transport Master Plan (PTMP) project and targets to kick start the project in 2H20. Gamuda achieved property pre-sales of RM2bn (-23% yoy) in 9MFY19 and hence full-year pre-sales may come in below its RM4bn target.

Maintain HOLD

Gamuda’s net gearing improved to 39% at end-3QFY19 from 52% at end- 4QFY18 after receiving the upfront cash proceeds of RM0.76bn from the disposal of SPLASH. The disposal of its toll highway stakes should improve its net gearing to 7%. We are positive of Gamuda’s prospects to expand its construction earnings in the long run and partially offset the potential loss of its toll highway earnings. We maintain our HOLD call given limited upside to our RNAV-based target price (TP) of RM4.08. Key upside risk is the higher-than-expected new contracts. Key downside risk is the prolonged property market downturn affecting its domestic sales.

Source: Affin Hwang Research - 28 Jun 2019