Period  2Q14/1H14

Actual vs. Expectations Gamuda’s 1H14 net profit of RM335.6m came in within expectations, accounting for 52% and 49% of our and consensus estimates, respectively.

Dividends  As expected, no dividend was declared in 2Q14.

Key Results Highlights  QoQ, Gamuda’s 2Q14 revenue (before FRS 11) rose by 11%, but its core net profit inched up slightly by only 3% to RM170.1m.

 YoY, Gamuda’s 2Q14 revenue (before FRS 11) and core net profit rose by 52% and 8%. Although PBT margins went down by 5.4% ppt, dragged down by lower construction margin (lower blended margins due to only 6% for elevated construction), higher construction and property divisions’ revenue boosted the overall bottomline performance. KVMRT1 project so far has been progressing well with financial progress of tunnelling and elevated in 2Q14 alone achieving 10% and 7%. So far, both KVMRT1 tunnelling and elevated have reached financial completion of 34% and 24%, respectively. As for its property division, Horizon Hills is still the main contributor.

Outlook  KVMRT2 approval offset the negativities. Despite (i) a slight slowdown in its property division due to property cooling measure, particularly in Iskandar and (ii) uncertainty in the Selangor water assets restructuring which affects Gamuda as the major shareholder of SPLASH, we are maintaining our POSITIVE view on Gamuda since the recently approved KVMRT2 by Cabinet clearly provides earnings visibility for Gamuda in the foreseeable future.

 The management’s view is that the earliest KVMRT2 can start construction works is in 1HCY16. This means the major construction awards (tunnelling and elevated) will materialize at least six months before i.e. 1HCY15 as had been the case of KVMRT1. We reaffirm our view that MMC-Gamuda JV will still be the tunnelling contractor and the PDP for the KVMRT2. The project is estimated at RM25b of which RM15b is for the elevated and the remaining RM10b for the tunnelling. Hence, Gamuda will replenish its orderbook by at least another RM5.0b in end-FY15 or early-FY16.

Change to Forecasts We revised our FY14 net profit forecast by +1.4% after Gamuda completed the KESAS’ transaction with Amcorp (increased stake in KESAS to 50%). We also adjust slightly our FY15 forecast by -4.2% after taking into account lower margins in its construction division. Nonetheless, we still forecast Gamuda’s net profit to grow 9% in FY15.

Rating Maintain OUTPERFORM

 We believe that Gamuda’s still strong fundamentals have yet to be fully priced in its share price.

Valuation  Revised higher to RM5.50 from RM5.25 (based on SoP) as we roll over our valuation parameters to FY15E.

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

Source: Kenanga