News     Gamuda released an amended announcement yesterday on its recent arbitration loss with Wayss & Freytag and clarified that the total cost of the arbitration to its joint venture MMCEG-Gamuda entity should stand at RM183.8m.

Comments     As we understand from Gamuda’s amended announcement, the total cost to be incurred by the MMCEG-Gamuda joint venture on the Wayss & Freytag case would now be at only 183.8m is higher by 75% than the previously announced RM105.3m.

However, the impact to Gamuda’s earnings now would be rather minimal as we further factor in an additional order of interest cost of RM14.1m for Gamuda’s 50% portion (previously already factored in RM77.8m losses) whereby the total interest cost of RM28.2m is based on the interest of 4% per annum on the sum of RM96.3m calculated from the date of termination of the sub-contract to the date of the award (refer overleaf for more info).

Going forward, we reiterate our view that a similar case is 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 tunneling portion for MRT, which provides it with greater control on this high-risk portion of the project, which tends to be prone to delays.

Outlook     Gamuda’s current order book remains healthy at c.RM4.2b, which should last it until 2017. Its outlook remains bright given that it will be in the running for the tunnelling works for the upcoming MRT line 2 and 3.

Forecast     We have reduced our FY13E estimates by 2% to RM521.9m as we factor in the additional one-off litigation cost of RM14.1m arising from the arbitration. However, there is no impact to our FY14E estimates.

Rating     Maintain OUTPERFORM

Valuation     No changes to our Target Price of RM4.49 based on an unchanged 14x FY14 PER.

Our TP offers an attractive 9% capital upside.

Risks     Delays in construction projects.

Rising building material costs.

Source: Kenanga