News  Recall Gamuda’s proposal to take over the remaining 70% stake in KESAS at 4th November 2013. Yesterday, which was the deadline of all the KESAS shareholders to accept the offer, Gamuda announced that only one of them namely Amcorp Properties Bhd (Amcorp) (who owned 20% of the highway company) responded by accepting the offer in principal subject to revision of certain terms of which there were no disclosure. The other shareholders namely PKNS and PNB did not respond, implying they rejected the offer.

 Full details will be announced after the signing of the relevant sale and purchase agreement by both parties.

 Earlier, Gamuda had offered to acquire the remaining 70% stake in KESAS, collectively for a cash consideration of RM875m (i.e. RM1.25b for 100% stake) from the shareholders of KESAS Holdings namely PKNS (30%), PNB (20%), and Amcorp (20%).

Comments  Although Gamuda was not able to secure full acceptance, we view the outcome as still POSITIVE as: (i) Gamuda’s stake in the lucrative KESAS highway will be increased to 50% from 30% previously, (ii) Gamuda bought it “relatively cheap” in which the price tag translates into only 7.7x and 1.9x FY13 PER and PBV against its peer, Litrak Holdings’ FY13 PER and PBV of 17.8x and 4.7x respectively, and (iii) Gamuda only has to fork out RM250m instead of RM875m that would have clawed into its balance sheet and increase its gearing ratio.

 Earnings accretion. Assuming Gamuda owns 50% of the highway, we expect its earnings to be boosted by additional RM24 – RM32m on a recurring basis. Hence, we will revise higher our FY14 and FY15 earnings estimates by +4.0% and 4.2% if the transaction can be completed within the next three month.

 No issue on funding as Gamuda’s latest net cash balance stood at RM1.1b, more than enough to fund the acquisition.

 If the deal goes through, our SoP valuation may also be revised higher to RM5.39 from current RM5.25, assuming 50% stake in KESAS Holdings.

Outlook  Despite the water deadlock which is likely to continue (refer our Water Sector Update dated 5th December 2013) which has shelved 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, (ii) being a prime beneficiary of rail-related infrastructure spending, i.e. MRT2 and Gemas-JB, and (iii) steady recurring income and cashflow from increased stake in KESAS.

Forecast  No change in our earnings estimates at this juncture pending completion of the transaction.

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  Pending completion of the transaction, we maintain our Target Price of RM5.25, based on SOP-derived valuation.

Risks to Our Call Delays in MRT executions and awards projects,

 Rising building material costs.

Source: Kenanga