Last Friday, GAMUDA announced that they received an offer from Ministry of Finance (MOF) for the take-over of its 4 highways namely, KESAS, SPRINT, LITRAK, and SMART for a collective enterprise value of RM6.20b, which translates to an effective equity value of RM2.36b for all of the above-mentioned highways for GAMUDA. Positive on the offer price as it is tad higher compared to our valuation. Reduced FY20E earnings by 17%. Maintain UP with a higher SoP-driven TP of RM2.90 (from RM2.85).

News. Last Friday, GAMUDA announced that they received an offer from Ministry of Finance (MOF) for the take-over of its 4 highways namely, KESAS, SPRINT, LITRAK, and SMART for a collective enterprise value of RM6.20b, which translates to an effective equity value of RM2.36b for all of the above-mentioned highways for GAMUDA.

Positive on offer price. We are mildly positive on the offer price proposed by MOF for the take-over of all the above-mentioned highways given that it is slightly above our expectations by RM135.4m or c.RM0.04 per share. We believe that the positive variance could come from the extended concession period from KESAS which we previously did not include into our valuation. In terms of gearing, we would expect its net gearing to come down from 0.6x to 0.3x levels upon completion of the sale of these highways.

Special dividend? Post-sale on the stake of those highways, we do not rule out the potential on special dividends as a reward for shareholders. Assuming 50% pay-out from the disposal of RM2.36b, we reckon that shareholders can expect a special dividend of 48 sen.

Lowers FY20E earnings. In terms of earnings, we reduced our FY20E earnings by 17%, as we anticipate that GAMUDA are still able to recognize several months of its toll earnings prior completion of the disposals.

Maintain UNDERPERFORM. While we are positive with the highway privatization deal, we reiterate UNDERPERFORM on the stock with a higher SoP-driven Target Price of RM2.90 (from RM2.85) as we factor in the acquisition price differential. We believe that the positives have been fully factored in its recent share price rally. Year-to-date, the stock has risen by 64% and we believe that it is a good opportunity to sell on strength. Our TP implies 14.4x FY20E PER which is higher than KLCON’s 10-year average of 13.3x.

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

Source: Kenanga Research - 24 Jun 2019