Gamuda’s 6MFY20 results came in below market and our expectations. The contraction in construction and property PBT margins was a surprise. We cut our core EPS forecast by 20% for FY20 to reflect a lower construction PBT margin, lower toll highway traffic volume and weaker property sales. We expect a weaker 2HFY20 performance due to the disruption from the Movement Control Order (MCO) in Malaysia. We reiterate our SELL call on Gamuda with a lower RM2.04 target price, based on a wider 40% discount to reduced RNAV.

Below Expectations

Gamuda’s 6MFY20 net profit of RM345m (+1% yoy) comprises 45-47% of market and our FY20 forecasts of RM729m and RM774m respectively. Revenue (including share of joint-venture revenue) grew 16% yoy to RM4bn in 6MFY20, driven by higher progress billings leading to rising construction (+24% yoy) and property (+4% yoy) revenues. However, Gamuda saw a lower construction PBT margin 7.3% in 6MFY20 compared to 8.9% in 6MFY19. Core PBT fell 3% yoy to RM218m due to lower concession earnings.

MRT2 Works Peaking and Starting to Ease

Civil works on the Klang Valley MRT Line 2 (MRT2) is peaking. Gamuda’s role in the project will be reduced and it will earn a lower project management PBT margin as the project moves to the final stage, involving Mechanical and Electrical (M&E) works to be undertaken by subcontractors. Tunnelling works will complete in 3-4 months and work continues despite the MCO due to safety reasons. Gamuda is optimistic that the RM21bn MRT3 project will be revived, given the need to pump-prime the economy amidst the expected economic slowdown caused by the MCO and Covid-19 pandemic.

High Remaining Order Book and Flat Sales

Gamuda achieved RM1bn property sales in 6MFY20. But still lags its RM4bn target sales in FY20. Its remaining order book of RM8.2bn is equivalent to 5.4x FY19 construction revenue, providing some earnings visibility.

Maintain SELL

There could be further selling pressure on Gamuda given weaker earnings expectations. Following our earnings downgrade (cut 20%), we expect Gamuda’s core EPS to contract 15% yoy in FY20E. We reduce our RNAV/share to RM3.40 from RM4.04 to reflect lower construction and property segment valuations. Based on trough 40% discount to RNAV (used 30% previously), we cut our TP to RM2.04 from RM2.83. Maintain SELL.

Source: Affin Hwang Research - 26 Mar 2020