Result

• Gamuda posted revenue and net profit of RM853.9m and RM166.3m respectively in 2QFY2017. Revenue surged 69.1% qoq and 61.9% yoy while net profit edged up 2.5% qoq and 3.8% yoy. Better performance recorded in 2Q was mainly lifted by stellar performance in construction sector that mitigated by property segment.

• Within expectations – 6MFY17 net profit of RM328.4m was in line with consensus and our estimate by meeting 47% and 45% of respective full year estimates.

Comment

• Stellar performance in construction segment backed by higher revenue and better margin. Construction’s 2QFY17 PBT soared 39.5% qoq and 81.2% yoy, backed by higher revenue (+12.7% qoq, 36.6% yoy) and better margin (+1.75pts qoq, +2.2pts yoy). Higher revenue was mainly due to higher work progress of the underground and elevated work for the KVMRT2. Meanwhile, better margin was resulted from the cost saving from the near completions of the underground works of KVMRT1. Similarly, 6MFY7’s PBT for construction segment jumped 49.5% to RM123m with a PBT margin of 8.3% as compared to 5.8% in 6MFY16.

• New growth cycle underpinned by current outstanding order book of RM8.3b as of 31 January 2017. The outstanding orderbook of RM8.3b is mainly made up by KVMRT2 underground package, which saw significant works recognition in this quarter. Besides, site preparation and preliminary works have also commenced in Pan Borneo Sarawak (worth RM1b) project. 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.

• RM783m (RM353m in 2QFY17) presales achieved in 6MFY17 is lagging behind its FY17 full year target sales of RM2.12b but we believe sales shall back on track in 2HFY17. We understand that presales achieved were mainly generated from improved sales in Horizon Hills, Jade Hills and Bukit Bantayan coupled with presales from Gamuda City in Hanoi and Celadon City in Ho Chi Minh City. Meanwhile, domestic presales expected to improve in 2HFY17, with 2 new launches stemming from Gamuda Gardens (June 2017) and Twentyfive.7 (2H2017). Planning and development located opposite Cyberjaya interchange are currently ongoing with 1.53 acre of development land.

• Higher revenue recognition in property segment bogged down by lower margin. Property segment’s 2QFY17 PBT notched up 4.6% qoq but dropped 8.7% yoy with revenue surged 48% qoq and 54.7% yoy. We believe the mediocre performance in PBT despite compelling revenue recognition was due to a big portion of the unbilled sales were generated by overseas sales, which generally command lower margin as compared to local sales products mix. As a result, PBT margin slid 4.35 pts qoq and 7.42 pts yoy. Cumulatively, 6MFY17’s PBT for property segment dropped 14.9% yoy to RM84m despite revenue jumped 25% yoy with PBT margin whittled 5.9 pts to 12.4%. Nevertheless, the group’s property earnings are underpinned by sizeable unbilled sales of RM2b.

• Concession segment remained resilient – Concession segment’s 2QFY16 PBT slid 8.5% qoq and 1.5% yoy. Overall, 6MFY17’s PBT for concession segment inched up 6.6% yoy. The yearly growth in concession segment was mainly attributed by Tolls concession despite a slowdown in traffic volume given higher toll rate.

• SPLASH disposal is expected to be concluded in 2HFY17. We understand from the management that the negotiations on disposal of Splash between federal and state governments are at advanced stage. However, recent article published by a media highlighting that the Selangor State Government will not chip in to take over the SPLASH. Meanwhile, there is still no conclusion reached and the discussion is still on-going for the final independent valuation report to be presented to the Cabinet. Should it be successful, 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 again being extended by state government to 31 August 2017 from the previous date of 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.

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 to latest full year PBT.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM5.04 based on SOP valuation. 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 due to the uncertainty on roll-out of the project.
   
• 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 - 24 Mar 2017