It was reported that Malaysia is looking to drop the KL-SG HSR project. It is a negative surprise for GAMUDA and its consortium partner MRCB, as they will no longer have the PDP role for the project. No changes to FY18-19E earnings. Maintain OUTPERFORM with a lower SoP-driven Target Price of RM5.50 (previously, RM5.65).

News. It was reported by various media that the Prime Minister of the newly formed government of Malaysia, Tun Dr Mahathir Mohamad, indicated that Malaysia is dropping the plan for a high-speed rail link between Kuala Lumpur and Singapore.

Negative surprise to GAMUDA and MRCB, as this move will cause them to lose their PDP role. To recap, the PDP role was awarded to GAMUDA and MRCB back in 5th April 2018, which we anticipate c.RM26.0b worth of works for their portion in the Northern region. However, we believe that the government’s swift decision may be a blessing in disguise for GAMUDA and MRCB as minimal work/cost been incurred for the project as it is still at preliminary stage.

Outlook. GAMUDA’s outstanding order-book comfortably stands at RM6.9b with 3-year visibility. 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.

Estimates unchanged. Despite the news of cancellation of HSR, we make no changes to our FY18-19E earnings, as we have yet factored it into our FY18-19E earnings given that we were only expecting construction works to kick off in 2020.

Maintain OUTPERFORM. We reiterate our OUTPERFORM call on GAMUDA on lower SoP-driven Target Price of RM5.50 (previously, MP; TP: RM5.65) after removing the HSR project from our valuation. Previously, we assumed 5% PDP fees on the back of project value of RM26.0b. Going forward, we believe GAMUDA would still be one of the top picks in the construction industry despite market uncertainty as they are one of the leading contractors that has vast experience in tunnelling works, making them a strong contender for projects like 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 - 30 May 2018