Yesterday, GAMUDA and its consortium partner MRCB won the LOI from MyHSR for HSR PDP role, which we were pleasantly surprised. No changes to FY18-19E earnings. Maintain OUTPERFORM with a higher SoP-driven Target Price of RM5.65 (previously, RM5.50).

News. Yesterday, GAMUDA announced that they and their consortium partner MRCB was awarded a Letter of Intent (“LOI”) by MyHSR Co (“MyHSR”) to undertake the role of a Project-Delivery-Partner (“PDP”) for the KL-SG High Speed Rail (“HSR”).

Pleasant surprise! Despite having mentioned in our strategy report that we are expecting newsflow from HSR in the near term, we were still pleasantly surprised with GAMUDA-MRCB’s (50:50) win on the PDP for HSR as we believed that all consortiums stood a good chance of winning the role. However, we did not anticipate MyHSR to appoint two PDP for a single project, as YTL-THP joint venture was appointed PDP Package 2 for the Southern region. While there is no indication of project value for HSR, we believe that it should range closer to c.RM45.0b based on the recent high-speed rail project approved in Thailand costing approximately USD7.2b or c.USD33m/km. Based on a simple ratio of 4 out of 7 stations in the Northern region, we assume that GAMUDA-MRCB’s portion to be worth c.RM26.0b while YTL-THP’s to be c.RM19.0b, and its PDP fees to be 6% or potentially lower.

Outlook. GAMUDA’s Outstanding order-book comfortably stands at RM6.9b and management remain ambitious in securing mega infrastructure projects, i.e. MRT3 and Pan Borneo Sabah with a collective replenishment potential of c.RM45.0b. However, we note that even if they manage to bag either one of these two projects, we would only expect significant profit contributions from FY2020 onwards. As for its property division, GAMUDA managed to rake in RM1.9b worth of sales in 1H18, bringing its unbilled sales to RM2.4b with 3-year visibility.

FY18-19E earnings maintained. Despite the appointment of PDP role, we make no changes to our FY18-19E earnings, as we believe that the contribution from HSR will only kick in earliest from FY20 as we are expecting the tenders for construction works to be called in 2HCY19.

Upgrade to OUTPERFORM. Post its win of HSR PDP role, we are upgrading GAMUDA to OUTPERFORM with a higher SoP-drive Target Price of RM5.65 (previously, MP; TP: RM5.50) after factoring in the project into our valuation after deriving its NPV, which we have conservatively assumed 5% PDP fees on the back of project value of RM26.0b with a WACC rate of 10%. Going forward, we believe that there are more re-rating catalysts for the stock should they secure another mega infrastructure project, i.e. MRT3.

Downside risks to our call include: (i) unexpected delay of MRT2 project, (ii) another deadlock in SPLASH takeover deal, (iii) higher-than- expected input costs, and (iv) lower-than-expected property sales.

Source: Kenanga Research - 06 Apr 2018