Result

• Gamuda posted revenue and net profit of RM513m and RM162m respectively in 1QFY2017, with revenue slid 17.8% qoq and 1.5% yoy while net profit edged up 6.6% qoq and 0.6% yoy. Better performance recorded in 1Q was mainly buoyed by better performance from water and Expressway concession segment.

• Within expectations –Net profit of RM162m for the 1QFY17 was in line with consensus and our estimate by meeting respective 22.6% and 22.2% of full year expectations.

Comment

• Unappealing construction segment as KVMRT2’s recognition has yet to kick in. The construction’s 1QFY17 PBT dropped 24.4% qoq but improved 16.3% yoy. Lower PBT on quarterly basis was attributed by timing difference of revenue recognition. Meanwhile, the improved PBT on yearly basis was mainly due to better margin as cost saving arising from near completion of KVMRT1. To update, cumulative progress on KVMRT1 underground works reaches 94% (up 2% qoq), whereas PDP scope is at 94%(up 4% qoq) as of 1QFY17, which is on track to meet its budgetary cost and KPIs.

• New growth cycle underpinned by current outstanding order book of RM8.9b. The outstanding orderbook of RM8.9b is mainly made up by KVMRT2 underground package (RM7.7b remaining), which see preliminary works have commenced. Besides, site preparation and preliminary works have also commenced in Pan Borneo Sarawak (RM1b) project. We expect the KVMRT2 works start contributing meaningfully to the Group’s earnings starting in 2HFY17. Going forward, the group is looking to secure more contracts from LRT3, Pan Borneo Highway (Sabah) and Gemas-JB double track projects, with a total target orderbook of RM3-4b.

• RM430m presales achieved in 1QFY17 which is on track to meet its FY17 full year target presales of RM2.12b. We learnt that the presales target of RM2.1b in FY17 will be generated from domestic (40%) and overseas (60%). Thus, the RM2b target sales in FY17 are heavily relied on overseas sales. Meanwhile, domestic presales expected to improve in FY17, with 3 new launches stemming from Gamuda Gardens (March 2017), Kundang Estates (December 2016) and Twentyfive.7 (Mid-2017).

• Property segment’s performance remained lackluster in 1QFY17. Property segment’s 1QFY17 PBT notched up 4.4% qoq but dropped 28.6% yoy. The lackluster performance was tracking the headwinds in property industry given the prevailing stringent mortgage approval and cautious consumer sentiment. Nevertheless, the group’s property earnings are underpinned by sizeable unbilled sales of RM1.9b. However, we understand that a big portion of the unbilled sales were generated by overseas sales, which generally command lower margin as compared to local sales. Therefore, we expect property margin to slide further in immediate future.
   
• Concession segment recorded vibrant performance – Concession segment’s 1QFY16 PBT jumped 13.6% qoq and 15.2% yoy. The yearly growth in concession segment was mainly attributed by Tolls concession despite a slowdown in traffic volume given higher toll rate, whereas we believe the quarterly growth was mainly due to contribution from higher traffic volume in view of September school holidays.
   
• Splash disposal expected to be concluded in Q2 next year. Understand that the negotiations on disposal of Splash between federal and state governments are at advanced stage. Management does not rule out the possibility of distributing the proceeds to shareholders as a special dividend.
   
• Progress in Penang Transport Master Plan (PTMP) still inconspicuous. The validity of the LOA for appointment as PDP for the PTMP has recently extended by state government to 28 February 2017. We learnt that Gamuda submitted its PTMP public transportation plan to Land Public Transport Commission (SPAD) for approval and in the midst of submitting the detailed environmental study to the Department of Environment (DOE) for approval (outcome expected in 2H2017). It is still uncertain whether the project will proceed as it is subject to approval by the federal government authorities.

• Declared single-tier first interim dividend of 6 sen per share with Ex-date on 3 Jan 2017, which translate into dividend yield of 1.25% based on current share price.

Earnings Outlook/Revision

• We keep our earnings forecast for FY17 and FY18 unchanged.

• Our earnings forecasts still include the earnings from Splash. We understand that the Water concession contributes roughly a quarter of latest full year PBT.

Valuation & Recommendation

• Maintain HOLD with a higher target price of RM5.04 (previously was RM4.86) based on SOP valuation after adjusting orderbook replenishment per year from RM3b to RM3.5b in view of several large infrastructure projects expected to be rolled-out over the next 2-3 years which are suited to the group’s core strength. Our target price also implies 19.4x FY2017F PER. Our fair value on Gamuda is yet to take into account of the PMTP’s PDP role.

• We maintain our neutral stance as we deem current share price is fairly valued. We believe the anticipation of stronger growth in FY17 onwards is reflected in current share price. In addition, concern on the weak performance in its property division also limits the upside. Meanwhile, potential catalyst from PTMP’s PDP role still remains tepid given its uncertainty and risk factors.
   
• Long gestation period for PTMP’s PDP. We view the successful bidding of PTMP’s PDP role as a long-term benefit to the Group as it takes time to unlock the value of land development right that earned as an exchange of the construction costs. The whole master plan can stretch as long as 15 to 20 years and hence, it may go up to two property cycles to realize the development value. However, we believe the management is able to mitigate the risk given the group’s sizeable balance sheet and vast experience in property sector.

Source: JF Apex Securities Research - 19 Dec 2016