News  Last Friday, Gamuda announced that it has received a Letter of Offer dated 21st November 2013 from the Selangor state government’s arm, Kumpulan Darul Ehsan Bhd (KDEB) with regards to the takeover of its 40-%owned SPLASH.  

As expected, KDEB is offering to buy the entire SPLASH equity at RM1.83b which remained the same as per the previous and fourth offer in February 2013.

SPLASH shareholders have been given 14 days to accept the offer (4th December 2013), unless KDEB agrees in writing to extend the closing date.

Comments    Not a major surprise, nevertheless, we are POSITIVE on the timing of the announcement. If Gamuda accepts the offer (which we believe it most likely would), it reinforces our view that Gamuda is set to announce a special dividend in the nearterm (3-6 month).

 Gamuda’s portion works out to be RM733.8m or RM32 sen/share. Management has confirmed that a big chunk of the proceeds will be distributed amongst shareholders, upon the receipt of cash from the gain of disposal of its 40%-owned SPLASH.

 6% potential yield. Since FY12, Gamuda has paid dividend of 12 sen/share. On top of that, assuming Gamuda decided to declare almost half of its SPLASH’s proceeds or 15 sen/share as special dividend, shareholders will get a yield 6%, based on last Friday’s closing price of RM4.89/share. This is rather attractive as compared to other contractors’ average dividend yield of less than 3.5%.

Outlook  Stay bright. In addition to the potential bumper dividend as well as being a prime beneficiary of multi-billion ringgit MRT projects, we view Gamuda as one of the beneficiaries for the Budget 2014 as the government remained committed to spend RM2.9b on the double tracking project. Gamuda has been short-listed for the project, via a JV consortium with one of the prominent contractors in China.

Forecast  No change in our earnings estimates at this juncture pending completion of exercise. Nonetheless, if the exercise is completed next year before July, we expect FY15 earnings forecasts to be revised lower by 15-18% as SPLASH contribute about RM80-135m/year to Gamuda’s bottom-line.

Rating Maintain OUTPERFORM

 Remain as our Top Pick for 4Q2013. Re-rating catalysts include (i) award of RM8.0b Southern Double Track project, (ii) potential divestment of other assets (e.g. Litrak) and (iii) higher-than-expected property sales.

Valuation  We maintain our Target Price of RM5.30, based on SOP derived valuation.

Risks to Our Call     Absence of special dividend from SPLASH divestment  Delays in MRT executions and awards projects.

 Rising building material costs.