Period  4Q14/FY14

Actual vs. Expectations Gamuda’s FY14 core net profit of RM712.3m came in slightly above our expectation but within consensus, accounting for 109% and 102% of ours and street’s estimates, respectively. The positive variance was because of we have underestimated its construction profit margin previously. We derived our core net profit after stripping out RM7.1m net gain following: (i) KESAS revaluation gain of RM194.2m, (ii) write-off for water concessions (SPLASH) premium, and (iii) write-off for Celadon City premium of RM41.4m.

Dividends  As expected, none. Cumulatively, Gamuda has declared 12 sen DPS for FY14, in line with our estimates.

Key Results Highlights QoQ, 4Q14 revenue declined by 35% mainly dragged down by construction division (PBT: -60%) following substantial completion of the Electrified Double Tracking Railway project. Nonetheless, net profit increased by 12% driven mainly by concessions division (PBT: -+71%) thanks to increase in KESAS’ stake to 70% from 30% previously.

 YoY, Gamuda’s net profit increased by 20% thanks to higher contribution from both property and concession divisions. As for property division, management mentioned that the higher profits were due to strong pre-sales achieved in FY13 and FY14 of about c.RM1.7-RM1.8b p.a.

 YTD, Gamuda hit another record profit in FY14 with core net profit stronger by 9% to RM712.3m. The stronger performance was mainly driven by: (i) KVMRT1 project’s progress, (ii) higher property sales recognition, and (iii) higher profits from concessions divisions following increased KESAS stake. All in, management is hoping that Gamuda will continue delivering another recordbreaking profit next year driven by: (i) its existing RM2.0b orderbook which has reached mid-stage of completion, (ii) strong unbilled sales of RM1.7b, and (iii) full-year effect of increased stake to 70% in KESAS.

Outlook  New hope for SPLASH due to new MB. Latest development that we gather from the Analysts’ Briefing yesterday is that the management mentioned that Gamuda will resume the negotiation with the new Menteri Besar soon and it is expected that it could herald in a satisfactory resolution for SPLASH takeover pricing. Note that Federal Government is heavily involved in the final stage of SPLASH resolution. Hence, we reaffirm our view that Gamuda’s shareholders may soon be enjoying special dividends (40 sen/share or 8% yield assuming almost all the proceeds are distributed to shareholders) pursuant to sale of SPLASH.

 KVMRT1 is on track. So far, cumulative financial progress on underground works and PDP scope is at 52% and 35%, respectively, at end 4Q14. This leaves Gamuda with RM2.0b orderbook to be finished by end-2016.

 Expect to at least maintain property sales this year despite slowdown in property market. The group is still confident to maintain at least FY14 sales of RM1.8b driven by pick-up in sales from Vietnam (build and sell concept), new launches in Kelana Jaya and ultimately Horizon Hills. While management admitted that the property market in Iskandar is softening due to oversupply of high-rise condos, it is not worried about Horizon Hills as there is still demand for genuine buyers for quality landed homes with resortstyle living in Iskandar.

Change to Forecasts    Despite the result came in slightly above our expectation, conservatively, we opt to maintain our FY15 numbers for now.

Rating Maintain OUTPERFORM

 We believe Gamuda will be the biggest beneficiary of more KVMRT2 news flow and possible positive outcome of SPLASH’s negotiation with Selangor and federal governments in 2H14. Valuation-wise, it is currently trading at fwd- PER of 14.6x FY15E which is cheaper than its 5-year average of 16-17x.

Valuation  Maintain our SoP-based Target Price of RM5.52, implying fwd-PER of 17x FY15 earnings, which is also in line with its 5-year average fwd-PER.

Risks to Our Call    Delays in KVMRT1 construction progress

 Unexpected scrapping of KVMRT2 project

 Another deadlock in SPLASH takeover deal

 Higher-than-expected input costs,

 Lower-than-expected property sales.

Source: Kenanga