We choose GAMUDA as our Top Pick, amidst the negative sentiment in the construction sector arising from uncertain prospects and cost reviews of mega infrastructure projects, as we believe that the negatives have been priced in. Currently, it is trading at FY19E PER of 9.9x which is below its 5-year -2SD level with a dividend yield of 3.6%. Maintain OUTPERFORM, with an unchanged SoP-driven Target Price of RM4.30.

Water matter resolved. In the recent FY18 results, GAMUDA booked in RM304.4m non cash flow impairment from SPLASH and Gamuda Water as they concluded their disposal of SPLASH to Selangor state government, while Gamuda Water continues to maintain the water- treatment plants in Rasa and Bukit Badong at lower re-negotiated rates (refer overleaf for details). However, we are positive with the resolution as they would be able to use the cash proceeds to pare down debts, which would lower its net gearing to 0.4x level and Selangor state had agreed to pay 90% of Gamuda Water’s long due receivables.

MRT2 cost review. Currently, GAMUDA is working closely with the government in effort to bring down the cost for MRT2. The review is taking longer than expected and we have no confirmed quantum on how much the project will be scaled down. However, based on our sensitive analysis, an RM8b reduction in contract size down to RM23.0b (from RM31.0b originally) will only result in a 4.4% reduction in FY19E CNP (refer overleaf for sensitivity analysis); substantial risk to earnings is when the reduction is more than RM8.0b.

Strong property sales. In FY18, GAMUDA achieved RM3.6b in property sales (local: 32%, overseas: 68%) bringing its unbilled sales to RM2.3b, which is sufficient to help them weather through the uncertain times, cushioning the impact from construction earnings downside due to cost review on MRT2. Going into FY19, management is targeting sales of RM4.0b as they are optimistic with their new projects, i.e. Gamuda Cove, Gamuda Gardens, and Twentyfive7 which have received encouraging responses from the market. To recap, they recently won a land tender from Singapore Housing Development Board for the development of Executive Condo (EC) in Anchorvale with an estimated GDV of RM2.0b, which we are positive, as the demand for EC remains resilient.

Estimates unchanged. No changes to our FY19-20E earnings for the time being, pending the outcome on MRT2’s cost review. Note that we do not expect GAMUDA to win any big jobs in FY19 until the cost review for MRT2 is concluded.

Maintain OUTPERFORM. All-in, we believe that most of the negative events for GAMUDA, i.e. MRT2 cost review and potential delay in MRT3 have been priced in. At current level, GAMUDA is trading at FY19E PER of 9.9x which is below is 5-year -2SD level. Hence, we believe that negatives for the stock have been well priced in and it is currently a good opportunity for bottom fishing. Maintain OUTPERFORM with an unchanged SoP-driven TP of RM4.30, which we have yet to factor in the potential from Penang Transport Master Plan. Our SoP-TP implies FY19E PER of 12.8x.

Risks to our call include: (i) unexpected delay of MRT2 project, and (ii) higher-than-expected input costs, and (iii) lower-than-expected property sales.

Source: Kenanga Research - 03 Oct 2018