1HFY20 CNP of RM346.3m (flat YoY) came within our expectation (57% of full-year forecast) but below consensus (48% of FY20 estimate). We expect 2HFY20 results to come in weaker as business activities will be hit by the Covid-19 MCO. No changes to our forecasts. Maintain OUTPERFORM with a lower target price of RM3.18 (based on PBV multiple of 0.95x), as we switch our valuation methodology from SoP to PBV.

On track to meet our expectations. 1HFY20 CNP of RM346.3m (flat YoY) was in-line (accounting for 57% of our full-year estimate) but fell short of consensus expectation (at 48% of FY20 estimate). 2HFY20 performance will be dragged down by the Covid-19 triggered Movement Control Order (MCO), as the Group’s business activities (except for its critical MRT2 tunnelling works) would be suspended for at least one month (18 Mar - 14 Apr). Meanwhile, 2QFY20 CNP of RM173.1m also came in flat YoY and QoQ.

Results’ highlight. The first half performance saw: (i) the engineering & construction segment contributing a net profit of RM140.8m (+7% YoY) on the back of revenue of RM2.7b (+24%) as PBT margin eased from 8.1% to 6.2%; (ii) the property development division making a net profit of RM87.9m (+2% YoY), partly weighed down by higher upfront development costs for the new townships; and (iii) the water & expressway concessions business posting a net profit contribution of RM120.1m (-5% YoY).

Briefing’s takeaways. Via a teleconference, Gamuda shared that: (i) the Penang Transport Master Plan (PTMP) could see delays following the change in Federal government, which may want to review a previous decision to guarantee the state bonds for financing the LRT component. Nonetheless, management remains hopeful to proceed with the signing of the project delivery partner (PDP) agreement with the state government in 2QCY20 and kick-start the Penang South Island (PSR) component under the PTMP; (ii) the status of its proposed sale of highways for a share of equity value of RM2.36b is in doubt now pending further engagement with the new administration; (iii) management is hoping the new government will revive the MRT3 project (at a revised cost of RM21b) later this year to pump prime the economy; and (iv) Gamuda will be pursuing alternative arrangements to venture into the Australia construction market after it decided not to sign a definitive agreement with its JV partner Martinus Rail.

Earnings forecasts intact. No change to our FY20E-FY21E projections. Forward earnings visibility will be underpinned by existing construction order-book of RM8.2b and unbilled property sales of RM2.3b (as the Group raked in property sales of RM1b in 1HFY20 with two-thirds coming from overseas).

Maintain OUTPERFORM call. We are shifting our valuation methodology from PER to PBV for construction stocks (with our updated recommendations and target prices to be published in our 2QCY20 strategy report due next week) in view of the low earnings visibility for the sector. For Gamuda, we have applied PBV multiple of 0.95x (-1SD below mean) on its latest BV per share of RM3.34 to derive our TP of RM3.18 (from our SoP-derived RM3.70 previously). Our TP also implies CY20 PER of 14.4x.

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

Source: Kenanga Research - 26 Mar 2020