News  Yesterday, Gamuda announced that its KESAS deal (to buy over the remaining 70% stake in the highway) with PNB, which owns 20% of the highway had lapsed. No specific reasons were stated except for “inability of PNB and Gamuda to execute a definitive agreement”. Supposedly, the cut-off date for PNB to fully accept the offer was on 7th February 2013.

 Recall, PNB had on 23rd December 2013 accepted in principle to dispose its 20% stake in KESAS to Gamuda at RM280m (implying total valuation of RM1.4b for the highway).

 Nevertheless, it was mentioned that Gamuda will continue with its best efforts to obtain the acceptance from PNB and PKNS upon the proposed acquisition from Amcorp Properties Berhad becoming unconditional.

Comments  We are NEUTRAL on the news as: (i) even if PNB rejects Gamuda’s offer, the latter will still own 50% of the KESAS highway given that Amcorp most likely will sign a definitive agreement in the near term and (ii) Gamuda does not have to consolidate KESAS’s balance sheet into its book, hence mild impact to Gamuda’s gearing level.

 Gamuda to offer higher valuation to PNB? However, we do not rule out any possibilities that Gamuda might be offering PNB an even higher valuation than RM280m despite the former had already revised the offer price higher by 12% on 23rd December 2013.

 As of now, assuming Gamuda will only own 50% of the highway; we expect its earnings to be boosted by additional RM24 – RM32m on a recurring basis. We will likely revise higher our FY14 and FY15 earnings estimates by 4.0% and 4.2% once Gamuda inked a definitive agreement with Amcorp.

Outlook  Although the KESAS deal with PNB had lapsed and the deadlock in Selangor’s water consolidation (refer our Water Sector Update dated 6th January 2014), 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 EDT.

Forecast  No change in our earnings estimates at this juncture.

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. Post-transaction with Amcorp, we will adjust our TP to RM5.22 to reflect the increased stake in KESAS from 30% to 50%.

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

 Rising building material costs.

Source: Kenanga