Yesterday, SPLASH, a 40%-owned associate of GAMUDA, accepted the take-over offer from Air Selangor. Lowered FY19E NP and CNP by 38% and 5%, respectively after factoring the write-down in book value and loss of recurring income from SPLASH. Maintain OUTPERFORM with a lower SoP-driven Target Price of RM4.30 (from RM4.35).

Offer accepted! Yesterday, GAMUDA announced that its 40%-owned associate SPLASH has resolved to accept the take-over offer from Air Selangor for RM2.55b. To recap, the proposed acquisition of SPLASH by Air Selangor includes 100% of SPLASH’s ordinary shares and 100% of SPLASH’s redeemable unsecured loan stocks, with RM1.9b to be paid as upfront payment while the remaining RM650.0m will be settled with 9-year installment as part of their SPA terms. Both Air Selangor and SPLASH are expected to finalise the terms and conditions of the SPA by 14 September 2018.

Sweet deal for Selangor. As highlighted in our previous report dated 6th August 2018, 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, which we believe is a sweet deal for the Selangor state government. That said, the current offer is still higher than the net offer made back in 2014 of RM250.6m. While, the offer price of RM2.55b came lower than expected we believe this bodes well for GAMUDA as the water saga in Selangor finally comes to an end, and they can now be fully focused on their on-going construction and development projects. That said, we also believe that they could potentially benefit from the resolution as we expect more water-related projects to be dished out in the future (1-2 years) as both federal and state governments could potentially allocate more budget in improving the infrastructure in the water sector, i.e. more water treatment plant, pipe replacement and etc.

Outlook. We do not expect any special dividend arising from the proceeds of the disposal, as we believe that GAMUDA may use it to pare down debts, which would bring down its net gearing from 0.55x to 0.42x. Its 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.

Earnings revision. We reduce our FY19E NP by 38% and CNP by 5%, after factoring the one-off loss of c.RM300.0m and the loss of recurring income arising from the sale of SPLASH.

Maintain OUTPERFORM. We maintain our OUTPERFORM call on GAMUDA based on a lower SoP-driven Target Price of RM4.30 from RM4.35 as we factor in the lower-than-expected offer price into our valuation. We believe that after the resolution of the water saga in Selangor, GAMUDA would be able to 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 - 10 Aug 2018