Last week, MOF announced that the cabinet took the offer from GAMUDA-MMC JV on the RM3.6b cost reduction for MRT2 tunnelling works bringing the cost down from RM16.7b to RM13.1b. Positive on the news and upgraded our FY19-20E earnings by 6%, respectively. Upgrade to OP, with a higher SoP-driven TP of RM3.35 (previously, MP; TP: RM3.25).

News. Last week, the Ministry of Finance (MOF) announced that the cabinet took the offer from GAMUDA-MMC JV on the RM3.6b cost reduction for MRT2 tunnelling works bringing the cost down from RM16.7b to RM13.1b. The value for the remaining works would be reduced from RM9.6b to RM6.0b. To recap, the government was looking at cost savings ranging from RM4.2-5.8b savings for the remaining tunnelling works.

Positive news. We are positive on the announcement from MOF, and laud both government and GAMUDA-MMC for their efficiency in concluding the renegotiation in such short span of time. In the renegotiated terms, it would include the cancellation of two underground stations, that is, Bandar Malaysia (North) and Bandar Malaysia (South) and we opined that the cancellation of these stations to be reasonable at this point due to the lack of development activities in Bandar Malaysia.

Work resumes. Government’s green light on the tunnelling works allows GAMUDA-MMC JV to carry on with their works in full swing albeit at a lower contract sum of RM6.0b for the remaining works without compromising the original timeline, which MRT2 is scheduled to be fully operational in year 2022. Recall when the news broke-out, we had actually downgraded our FY19-20E earnings by 33-32% as we removed the tunnelling works from our estimates. That aside, we also downgraded the stock to MP with a lower TP of RM3.25 (prior termination of contract it was our Top Pick; OP; TP: RM4.30)

Outlook. After securing the tunneling works on a renegotiated terms, it brings GAMUDA’s orderbook to RM3.5b (from RM0.5b) and its outlook will be less dependent on its property division, which have unbilled sales RM2.3b providing them another 1-2 years of visibility and also its infrastructure division which consists of toll roads.

Earnings upgrade. We upgrade our FY19-20E earnings by 6%, respectively as we factor in the renegotiated tunneling works into our forecast.

Upgrade to OUTPERFORM. Subsequently, we also upgrade GAMUDA to OUTPERFORM (previously, MARKET PERFORM) with a higher SoP-driven Target Price of RM3.35 (previously, RM3.25) as the share price has fallen by 23% since the news of the termination. Currently, it is only trading at 12.0x FY19E PER below KLCON’s 5-year average of 13.4x.

Risks to our call include: (i) cancellation of toll concessions, and (ii) higher-than-expected input costs, and (iii) lower-than-expected property sales.

Source: Kenanga Research - 29 Oct 2018