News  Gamuda announced that it has made offers to the shareholders of KESAS Holdings, namely PKNS (30%), PNB (20%), and Amcorp Properties Bhd (20%), to acquire the remaining 70% stake collectively for a cash consideration of RM875m (i.e. RM1.25b for 100% stake).

  The offer shall remain open for acceptance until 18 November 2013, unless Gamuda agrees in writing to extend the offer period. The offer also requires approvals from shareholders, authorities, government, related ministry and any other related parties.

 Comments  We are positively surprised with the news. The offer price of RM1.25b translates into (i) a 7.8x FY13 PER (vs. Litrak Holdings’ FY13 PER of 17.8x) or (ii) a PBV of 1.9x (as compared to that of Litrak’s 4.7x). The offer price tag is also 24% lower than that of our DCF-derived KESAS valuation of RM1.63b.

  Earnings accretion. KESAS is a “cash-cow” company, which easily could provide an additional RM100m into Gamuda’s bottomline at least for the next 10 years (concession to end 2024) if it were to own 100% of the highway. As at FY13 (YE: March), KESAS Holdings’ net profit jumped 80% YoY to RM161.7m, which we believe was boosted by higher traffic growth and compensation from government following the toll reduction. Hence, if the deal goes through, we will revise higher our FY14-FY15 earnings estimates by +15.4% - 13.3%.

  No issue on funding as Gamuda’s net cash balance as at July 2013 stood at RM1.23b more than enough to fund the acquisition. In fact, Gamuda’s book value would likely to increase by 13% to RM2.40 from current RM2.13 if the deal goes through.

 If the deal goes through, our SOP valuation may also be revised higher to RM5.60 – RM5.80 from current RM5.30 assuming 100% stake in KESAS Holdings.

 Outlook  Budget 2014 augured well for Gamuda as it is one of the most capable railway contractors in Malaysia and the government has committed to build the RM8.0b Southern Double Track Gemas-JB railway (final stretch of EDT).

Forecast  No change in our earnings estimates at this juncture pending acceptance of the offer from the KESAS shareholders.

Rating Maintain OUTPERFORM

  We are maintaining our OUTPERFORM recommendation on Gamuda and the stock remains as our Top Pick for the sector. Besides the MRT2 project and Selangor’s water consolidation, the acceptance of KESAS’ shareholders to let go their stakes to Gamuda and the contract award of Southern Gemas-JB EDT could be fresh re-rating catalysts for Gamuda.

Valuation  Pending the offer outcome, we maintain our Target Price of RM5.30, based on SOP-derived valuation.

Risks to Our Call  Delays in MRT executions and awards projects

 Rising building material costs. 

Source: Kenanga