Gamuda’s share price may react to two news articles with mixed implications. On one hand, according to market talk, the plan for the government to take over its four highways could be called off, which would have otherwise boosted its coffer to undertake mega infrastructure projects (such as PTMP) and reward its shareholders with special dividends. On the other hand, the possibility of a revival of the HSR project represents an opportunity for Gamuda to replenish its order-book. After climbing 22% since our last update, we are downgrading our call from OUTPERFORM to MARKET PERFORM with an unchanged TP of RM3.18 (based on PBV of 0.95x or -1SD from mean).

Deal or no deal? Over the weekend, The Edge Weekly reported that Gamuda’s plan to divest its four highways to the government may have fallen through. There was, however, no mention of any details regarding the justification for the deal to be called off (other than citing market talk). To recap, Gamuda has proposed to sell its stakes in four highways (LDP, Kesas, Sprint and Smart Tunnel) for its share of an equity value of RM2.36b (or 93.9 sen/share) with the definitive agreements previously supposed to be signed by 29 February this year (after three extensions). The proposal is now in a state of limbo following the change in government. If there is no deal, the stock may see a negative knee-jerk reaction due to the disappointment of Gamuda not getting the sizeable cash proceeds (which otherwise could be used for special dividends and funding new mega infrastructure projects like the Penang Transport Master Plan (PTMP)).

Still, for investors with a medium-term horizon, a no-deal may turn out to be a blessing in disguise as Gamuda would then continue to rake in recurring income from toll receipts.

HSR to be revived soon? In an accompanying article, quoting several sources, The Edge Weekly said the government is looking to revive the Kuala Lumpur-Singapore High Speed Rail (HSR) project soon. According to the report, negotiation with Singapore is likely to commence soon, although the source added that “nothing is concrete as yet”. Recall that the HSR project costing RM60b+ was first mooted by the Barisan Nasional (BN) government but was subsequently mothballed by the Pakatan Harapan (PH) government in mid-2018 (which cited a revised all-in cost of ~RM100b). Following the suspension, both Malaysia and Singapore were scheduled to revisit the project by end-May 2020.

In our 2QCY20 sector report, we expressed our view that the government is not likely to roll out mega infrastructure projects in the immediate-term to pump prime the economy as its most urgent priority at the moment is to alleviate the people’s burden by providing immediate financial support due to the Covid-19 pandemic. Should the government decide to revive HSR, this could trigger speculative buying interest in construction stocks like Gamuda. Yet, it remains to be seen if Gamuda – which via its 50:50 JV with MRCB was previously appointed to be the project delivery partner for the northern portion (running between Bandar Malaysia and Malacca) of the HSR project in Apr 2018 – will still get to win the job again as the government may want to re-evaluate interested bidders for the HSR project on an open tender basis.

Downgrade to MP. Following our last sector update, the stock has risen 22% to RM3.27 currently. With our TP unchanged at RM3.18 (based on PBV of 0.95x or -1SD from mean), this has prompted us to downgrade our call from OUTPERFORM to MARKET PERFORM.

Source: Kenanga Research - 18 May 2020