Period  1Q14

Actual vs. Expectations Gamuda’s 1Q14 net profit of RM165.5m came in within expectations, accounting for 26% and 24% of our and consensus’ estimates, respectively.

Dividends  As expected, an interim dividend of 6 sen was declared.

Key Results Highlights Effective 1Q14, Gamuda has to comply with new accounting standard of “FRS 11” where it has to recognise its interests in all incorporated joint ventures using the equity method (share of JVs which reported as net of tax). Key impacts of the FRS 11 include, among others, (i) substantial Gamuda’s revenue, EBIT and PBT “lost” as significant activities (e.g. MMC:Gamuda’s MRT, northern double track projects, Horizon hills) are carried out by incorporated JV, and (ii) margins will be distorted. Nonetheless, no impact on net profit. (refer overleaf to see the impact on PNL)

 QoQ, before FRS 11, Gamuda’s 1Q14 revenue declined by 9% but its core net profit remained steady, delivering almost similar quantum as in 4Q13, i.e. RM165.5.

 YoY, before FRS 11, Gamuda’s 1Q14 revenue and core 1Q14 net profit rose by 56% and 14%. Key earnings growth drivers for 1Q14 are strong construction and property divisions’ performances. MRT1 project so far has been progressing well with financial progress of tunnelling and elevated increasing by 5% qoq and 6% qoq to 17% and 24%, respectively. Construction PBT margin fell to 7.6% from 11.5% in 1Q13 due to lower margins of elevated MRT. Meanwhile, Iskandar Horizon Hills remain as the main earnings contributor for its property division.

Outlook  Despite the water deadlock which is likely to continue (refer our Water Sector Update dated 5th December 2013) and shelve the potential special dividend payment in the nearterm, Gamuda’s outlook remains bright on the back of (i) strong earnings growth driven by unbilled orderbook and property sales of RM3.1b and RM1.7b, respectively, and (ii) being a prime beneficiary of rail-related infrastructure spending, i.e. MRT2 and Gemas-JB.

 Management remains optimistic that the Cabinet will approve the MRT2 project in the near term (1-3 months). Moreover, management is not unduly worried on the recent property cooling measures (i.e. foreign property purchase price threshold of RM1.0m that likely been affecting Iskandar area) as demand is seen staying strong until the implementation in May 2014. It is not a major concern also as its property development projects in Iskandar such as Horizon Hills are mostly selling above RM800k.

Change to Forecasts     No change in our net profit forecasts. Meanwhile, we have adjusted accordingly our revenue, EBIT and PBT forecasts to reflect the compliance of the accounting standard FRS11.

Rating Maintain OUTPERFORM    We believe that Gamuda’s still-strong fundamentals have yet to be fully priced in its share price. The recent sell-down on the stock due to concerns on Fed tapering and potential prolonged water deadlock seems to be an opportune window for investors to accumulate the stock.

Valuation  Reiterate our Target Price of RM5.25 based on SOP derived valuation. At this current price, the stock’s implied fwd-PER (FY15) of 13.9x is relatively cheap as compared to its 5-year mean of 18x.

Risks to Our Call  Delays in MRT execution and awards, rising building material costs, lower-than-expected property sales.

Source: Kenanga