News     Yesterday, Gamuda announced that its joint venture entity, MMCEG-Gamuda had received an arbitration judgement to pay Wayss & Freytag the sum of RM96.3m together with interest thereon at 5.0% per annum from 16 April 2013, and a sum of RM9.0m as cost, totalling to a full sum of RM105.3m

Comments     The news caught us by surprise as we did not expect Wayss & Freytag (Malaysia) Sdn Bhd to win the litigation. To recap; in Jan-06, Wayss & Freytag’s contract to construct and complete the North Tunnel Drive of the Stormwater Management and Road Tunnel Project (“SMART”) was terminated by MMCEG-Gamuda due to delays on the progress of its works, which resulted in a material litigation in 2008.

We view this news negatively as it would dampen MMCCORPS’s earnings in FY13. Although the MMCEG-Gamuda is a 50:50 JV, we understand that the amount to be incurred by MMCCORP would be RM27.5m, making up the remaining 26% of the total arbitration cost, based on Gamuda’s Bursa announcement. However, we are unclear the reason for an uneven split of the cost and is seeking further clarity on the matter.

Going forward, similar incidences are less likely to occur in the current MMC-Gamuda KVMRT JV as the current Project Delivery Partner (“PDP”) setup has a better control over the sub-contractors through a KPI monitoring process i.e. progress milestone. This time around, MMC-Gamuda is also taking direct charge of the tunnelling portion for MRT, which provides them greater control on a high-risk portion of the project, which tends to be prone to delays.

Outlook      We believe that MMCCORP will be one of the stocks to be in focus post-election as it could be looking to sell its 200 acres land in Tanjung Bin to an independent terminal operator and also possible asset replacements for GASMSIA and MALAKOFF after their listings.

Forecast      We are reducing our FY13 estimate by 5% to RM404.0m as we factor in the additional one-off cost of RM27.5m arising from the arbitration.

Rating     Maintain MARKET PERFORM

We are maintaining MARKET PERFORM rating on the stock partially due to the General Election risk/uncertainties.

Valuation     We maintain our Target Price of RM2.80 based on SOP valuation.

Risks      Delays in the MRT progress.

Source: Kenanga