What’s new

• The Ministry of Finance (MOF) announced that underground portion of the Klang Valley Mass Rapid Transit 2 (KV MRT2) project will be continued by MMC-Gamuda with a revised price tag of RM13.11b.

• The price tag is derived by additional cut of RM1.47b from the previous offer of RM2.13b. As such, the total cost for the underground portion of KVMRT came down RM3.6b from RM16.71b.

• It is understood that with the cost rationalization exercise, 2 underground stations – Bandar Malaysia (North) and Bandar Malaysia (South) will be postponed.

Comment

• We are positive with the development as the group is able to conclude the negotiation with government and resecures the underground portion. We believe an amiable working relationship with the government is vital for the group in the long run. With this latest development, the group also demonstrates its effort in benefiting other stakeholders besides solely focusing on maximizing shareholder’s value.

• Total cost of KVMRT2 underground work is down by 21.5% whilst Gamuda’s remaining orderbook is scaled down by c.32.7%. The outstanding orderbook for underground portion as of 4QFY2018 was stood at RM5.5b. After adjusting for Gamuda’s share of revised cost, remaining orderbook for underground portion is stood at RM3.7b, which indicates a 32.7% drop in value.

• Based on our preliminary assessment, Gamuda’s outstanding orderbook stands at RM10.1b. To recap, Gamuda’s orderbook was stood at RM6b in Jul 2018 (RM5.5b underground portion and RM0.5b Pan Borneo Sarawak Highway). After accounting for scale down of underground portion and reclassification of RM5.9b elevated works following its new role as a turnkey contractor from PDP earlier, the group’s outstanding orderbook shall stand at RM10.1b. Nevertheless, in view of the new government’s effort to tighten its development expenditure, we believe orderbook replenishment for 2019 is subdued.

• Margin contraction. We opine that the upper portion where Gamuda-MMC has now become the turnkey contractor might not be able to generate the original PDP margin of c.6%. This is coupled with the cost rationalization exercise (cost reduction of 23%) in which we believe the margin would be thin. Similarly, underground portion is facing the same issue. Thus, it might not translate into a meaningful profit amid a sizeable of orderbook secured.

Earnings Outlook/Revision

• We retain our earnings forecasts for FY19 and FY20 despite the group has resecured the underground portion as we doubt that it will generate a meaningful profit to its bottom line.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM2.70 (RM2.83 previously) after lowering down our earnings margins and increasing its target orderbook replenishment assigned to our SOP valuation under construction business. Meanwhile, we apply a higher discount to RNAV for its property segment (from 20% to 25%) to better reflect overall challenging residential market outlook. Our revised target price now implies 12.5x FY19F PE.

Source: JF Apex Securities Research - 29 Oct 2018