Period  3Q14/9M14

Actual vs. Expectations Gamuda’s 9M13 net profit of RM513.5m came in within expectations, accounting for 78% and 76% of our fullyear forecast and street's estimates, respectively.

Dividends  As expected, second interim dividend of 6 sen was declared in 3Q14. Cumulatively, Gamuda declared 12 sen DPS, translating to a dividend yield of 2.54%

Key Results Highlights QoQ, although 3Q14 revenue decreased marginally by -5% to RM1273.4m, Gamuda’s core net profit inched higher by 5% to RM178m. The slight improvement in net profit was mainly due to Gamuda’s MRT project has reached mid-stage of construction stage hence better margins.

 YoY, Gamuda’s core 3Q14 net profit marginally declined by -4% due to the group can no longer enjoy high margins (double-digit in PBT level) for its construction division following high-margin project such as Ipoh-Padang Besar EDT has reached 100% completion. Higher taxation in 3Q14 also part of the reasons of weaker YoY.

 YTD, Gamuda’s 9MFY14 core net profit increased by +6% YoY on the back of stronger revenue from construction side and higher sales recognition from property division. Going forward, the management expects QoQ performance will be better in 4Q14, which means the group will be registering another record breaking year in FY14.

Outlook  Jobs prospects stay bright with KVMRT2. While KVMRT1 project running on schedule, management updated during Analyst briefing yesterday that the approved KVMRT2 project has started its preliminary works. We also understand that the government is finetuning the railway track’s alignment and soon it will make it public for feedback. As we expect the tender will out by end of next year, we reaffirm our view that MMCGamuda JV will still be the tunnelling contractor and the PDP for the project. It is estimated that the project cost about 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 by early-mid FY16.

 SPLASH now in focus. As previously mentioned in our Water sector report (dated 23 June 2014; The Saga is

About To End), management reiterated that its 40%-owned SPLASH is now heavily in focus by federal and state governments after Puncak (OP; TP: RM4.30) accepts the latter’s offer recently. Hence, we are now return back to our initial expectation that Gamuda’s shareholders may soon be enjoying special dividends (40 sen/share or 8% yield assuming almost all of the proceeds to distribute to shareholders) pursuant to sale of its SPLASH.

Change to Forecasts While keeping FY14 numbers relatively unchanged, we revised our FY15 earnings estimate slightly higher by +2% to reflect its increased stake in KESAS to 70% from 50% recently after PNB has accepted its revised offer.

Rating Maintain OUTPERFORM

 We are now switching our top pick to GAMUDA from IJM CORP for 3Q14 outlook. It is mainly due to the possible positive outcome of SPLASH’s negotiation with state and federal governments, which will then result to potential special dividend payments to the shareholders. We also believe that Gamuda will be the biggest beneficiary of the expected more KVMRT2 news flows in 3Q14. Valuation wise, it is currently trading at a fwd-PER of 14.6x FY15E which is substantially cheaper than that of its 5-year average of 16-17x.

Valuation  Target Price tweaked higher to RM5.52 (implied fwd-PER of 17x FY15 earnings, in line with its 5-year average fwd-PER) from RM5.50 (based on SoP) following increased stake in KESAS to 70% from 50% previously.

Risks to Our Call     Delays in KVMRT1 construction progress,

 Unexpected scrapped in KVMRT2 project by the government

 Another deadlock in SPLASH takeover deal

 Higher-than-expected input costs,

 Lower-than-expected property sales.

Source: Kenanga