News  Just a few days after the deadline for the remaining KESAS’ shareholders’ acceptance i.e. 18th December 2013 (which only Amcorp accepted), Gamuda has made fresh offers to the KESAS shareholders who had rejected the earlier offer, namely PNB (20% stake) and PKNS (30% stake).

 Gamuda has increased the offer price by 12% to RM280m and RM420m for PNB and PKNS, respectively. Gamuda is also increasing Amcorp’s offer value to RM280m. Altogether, Gamuda’s offer price for 70% stake in KESAS is RM980m (RM1.4b for 100% stake). The shareholders have to respond before 30th December, unless Gamuda extends the offer in writing.

Comments  Still fair. We are of the view that the 12% increase in the offer price is still fair judging from the valuation of normalised PER of 12x (average net profit of RM120m) against its peer, Litrak Holdings of 17x. It is also still below our valuation for KESAS Holdings (based on DCF) at RM1.63b.

 Earnings accretion. As mentioned previously (see our report dated 6th November 2013, when Gamuda first make the offer), KESAS is a “cash-cow” company, which could easily 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. According to the management, on normalised basis, KESAS’ net profit is about RM120m per annum. Hence, if the deal goes through, we will revise higher our FY14 and FY15 earnings estimates by +12.9% and 11.3%.

 Mild impact to the balance sheet, but still manageable. If the deal goes through, we estimate that Gamuda’s net gearing will increase to 30% from the current 14%. We believe this is still manageable, as compared to its competitors’ gearing of about 50-70%. On a positive note, the net asset value for Gamuda will increase to RM2.40 from current RM2.21 per share.

 If the deal goes through, our SoP valuation may also be revised higher to RM5.60–RM5.80 from the current RM5.25, assuming a 100% stake in KESAS Holdings.

Outlook  Despite the water deadlock which is likely to continue (refer our Water Sector Update dated 5th December 2013) and effectively shelved the potential special dividend payment in the near term, 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, (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 strong fundamentals have yet to be fully priced in its share price. The recent sell-down of 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