Last Friday, SPLASH, a 40%-owned associate of GAMUDA, has received a take-over offer at RM2.55b from Air Selangor. We are positive as the current offer from the Selangor state is seen to be more reasonable compared to the previous offer that GAMUDA rejected back in 2014. No changes to FY18-19E earnings for now. Maintain OUTPERFORM with an unchanged SoP-driven Target Price of RM4.35.

SPLASHY deal at RM2.55b. Last Friday, GAMUDA announced that its 40%-owned associate SPLASH has received a take-over offer from Air Selangor for RM2.55b. The proposed acquisition of SPLASH by Air Selangor includes 100% of SPLASH’s ordinary shares and 100% of SPLASH’s redeemable unsecured loan stocks, of which RM1.9b to be paid as upfront payment while the remaining RM650.0m will be settled in 9-year installment as part of their SPA terms.

Accept offer? The offer price of RM2.55b from Air Selangor represents a 26% discount to its net book value of RM3.5b as of Dec 2017. However, it is still higher than the net offer back in 2014 of RM250.6m. We believe that the Selangor state government stands to benefit from a decent deal should GAMUDA choose to accept their offer before 10th August 2018. The offer price of RM2.55b is still short of our expectation of RM3.1-3.5b, which represents 0.9-1.0x of its book value. However, we believe that GAMUDA should consider taking up the offer in light of SPLASH’s ballooning receivables that is long due, especially when the current offer is much more reasonable compared to the previous one. If the deal goes through, we can expect net gearing of 0.55x as of 3Q18 to come off to 0.42x. However, we believe that the possibility for a special dividend is slim as management might conserve cash for future projects.

Outlook. GAMUDA’s outstanding order-book comfortably stands at RM6.4b 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. We make no changes to our FY18-19E earnings for now, pending the decision from GAMUDA. However, should GAMUDA choose to accept the offer, it would have a negative impact to our FY19E earnings, as they would be incurring losses of >RM300.0m from the disposal of SPLASH (excluding loss of future income from SPLASH) coupled with c.RM100.0m of core earnings contribution from SPLASH.

Maintain OUTPERFORM. We maintain our OUTPERFORM call on GAMUDA based on an unchanged SoP-driven Target Price of RM4.35 for now, pending more details from management. However, we are likely to lower our Target Price to RM4.30 should GAMUDA choose to accept Air Selangor’s offer as the proposed consideration is lower than our current valuations. We believe that after the resolution of the water saga in Selangor, GAMUDA would be able move on and focus on future projects like the Penang Transport Master Plan, and 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 Aug 2018