What’s new

• Gamuda’s shares were suspended on 3rd August 2018 pending material announcement.

• In the evening on that day, Gamuda announced that the group’s 40% associate company, Syarikat Pengeluar Air Selangor Holdings Berhad (SPLASH) had received a Letter of Offer from Pengurusan Air Selangor Sdn Bhd (Air Selangor) in respect of Air Selangor’s proposed purchase of 100% equity in SPLASH.

• Purchase consideration for entire stake of SPLASH is valued at RM2.55b.

Comment

• We believe Gamuda will accept the deal despite a discount from its book value of RM 3.54b (as of June 2018). We opine that Gamuda will accept the deal since the disposal of Splash proposal has been dragging for years. Meanwhile, offer price is close to Gamuda’s expectation of 1x book value as contrast to previous offers which were deemed unrealistic to the group. As such, Gamuda is willing to take a haircut, we believe.

• Purchase price is 22% discount to Book Value of RM3.28b. The price offered by Air Selangor of RM2.55b is 22% discount to SPLASH’s book value of RM 3.28b. As such, Gamuda’s share portion worth RM1.02b, which translates into c. 40.6 sen per share.

• RM1.9b upfront payment on the completion date after fulfilling all conditions prescribed in purchase agreement, with RM650m remaining to be settled in 9 annual instalments. We understand that the remaining 9 installments (RM72.2m per installment) is subject to a 5.25% interests per annum. Thus, Gamuda’s share portion is RM28.88m per installment.

• Completion of the share purchase agreement is subject to the completion of a due diligence inquiry on SPLASH, regulatory approvals from the Selangor state and relevant authorities and other conditions customary of such transaction. We believe the deal will complete smoothly in view of the speediness and eagerness of the new federal government and Selangor state government in concluding the deal and resolving the long outstanding of this water impasse.

• We believe Gamuda will retain most of the sales proceed due to requirement for future CAPEX for Penang Transport Master Plan (PTMP) instead of giving out all as a special dividend. We believe progress in PTMP will be expedited given the PTMP is one of the top priorities for the new Penang governor. Furthermore, we believe the state govt. of Penang would receive necessary approvals from the federal govt. and DOE in the near future.
• Upon completion of the deal, Splash earnings of C.RM100m/year will be left out from the group as well as one-time impairment will be incurred as selling price is below BV. Historically, Gamuda has recorded profits of RM103.6m, RM115.8m and RM97.4m from SPLASH for its FY15/FY16/FY17 respectively. As such, upon completion of the deal, Gamuda’s future earnings are expected to drop by 12.4% (excluding asset impairment) from our initial earnings forecast of RM809m in FY19F.

Earnings Outlook/Revision

• We retain our earnings forecasts for FY18F and FY19F pending acceptance from the group.

• Our earnings forecasts still include the bottom line contribution from SPLASH.

Valuation & Recommendation

• Maintained HOLD with a higher target price of RM3.56 (previously was RM3.44) after adjusting for: a) a lower valuation for SPLASH (reduced to disposal price of RM2.55b from RM3.277b book value); b) a higher sustainable orderbook, from RM1b to RM1.5b, under its Construction segment in view of the possible approval of PTMP and a less gloomy outlook for construction industry, as the new ruling govt. clarified that previous mega projects could still be carried out in a later stage provided govt. budget is permissible instead of outright cancelation. Should the rail-related mega projects resume, Gamuda will still be the front runner given its vast experience in the job scope. Our target price for Gamuda also implies 11.9x FY19F PE.

Source: JF Apex Securities Research - 6 Aug 2018