News      Gamuda announced that its 51:49 joint venture entity Gamuda-WCT’s counter claims against Bahrain Asphalt Establishment’s (“BAE”) arbitration had failed and been dismissed. Gamuda-WCT JV has been ordered to pay BAE a total sum of RM53.6m for BAE’s claims, legal and other costs.

Comments     We are surprised by the news as we did not expect two arbitration losses to hit Gamuda in a month and BAE to win their claims against the Gamuda-WCT JV.

To recap, the Gamuda-WCT JV entered into a subcontract with BAE on Feb-06 for the works known as the granular sub-base and flexible pavement works for the JV’s project known as “Dukhan Highway from Shahaniya to Zekreet," in Qatar. However, due to the delays on the main project, BAE’s sub-contractor works are also affected. Hence, BAE was awarded RM38.1m for its claims on cost overruns, legal costs of RM14.3m and other costs of RM1.3m totalling to RM53.6m.

In the meantime, the Gamuda-WCT JV is still pursuing its claims with the Qatar’s Public Works Authority in respect for the main contract.

We view the arbitration loss negatively as it would further hurt Gamuda’s earnings in FY13. As we understand it, Gamuda’s total loss on the arbitration would be RM27.3m out of the total cost of RM53.6m given its 51% stake in the JV.

Outlook    Going forward, we would not be expecting anymore arbitration claims from others against Gamuda (other than the recent Wayss & Freytag case and BAE now) as these two were the only material litigations known and disclosed by Gamuda.

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

Forecast     We have reduced our FY13E earnings by 4% to RM500.1m as we factored in the additional one-off litigation cost of RM27.3m arising from the arbitration. However, there is no impact to our FY14E estimate.

Rating     Maintain OUTPERFORM

Our OUTPERFORM recommendation is maintained as we believe that Gamuda is finally cleared from material litigation cases and its continuing healthy prospects.

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

Risks      Delays in construction projects.

Rising building material costs.

Source: Kenanga