Despite 1QFY21 coming below expectations, we continue to like Gamuda for: (i) their dominance in the local infrastructure space which is bound to benefit from imminent pump-priming initiatives, and (ii) high possibility of penetrating into prominent international projects especially in Australia. While we trim FY21E earnings by 20%, maintain OP with higher SoP-TP of RM4.20 (from RM4.10) after incorporating the definite implementation of MRT3 post Budget-21 (vs 50% chance imputed previously).

Below expectations. 1QFY21 CNP of RM109.3m (-16% QoQ; -37% YoY) came in below ours/consensus expectation, accounting for 16%/18% of full-year estimate. The negative deviation stemmed from: (i) less-than-optimal progression at their property division due to lockdown compliance leading to a sharp contraction in margins, and (ii) lower-than-expected traffic numbers from their concession division owing to the re-imposition of CMCO in mid-October.

The omission of their traditional 6.0 sen dividend every 1Q is within our expectation. 1QFY21 property sales of RM673m is also in line with our/management’s target of RM3.2b/RM3.5b.

Highlights. 1QFY21 CNP of RM109m decreased 16% QoQ attributed to the lower PAT contributions from property (-68%) and toll concession business (-43%). The property division suffered a severe deterioration in margin (-11ppt) due to sub-optimal progression of works while its concession segment was affected by the re-imposition of CMCO leading to traffic volumes falling by 12% to 50% across their four highways. YoY, 1QFY21 CNP was lower 37% due to the impact from the Covid-19 pandemic.

Strong pipeline of awards in the coming years. The six key mega projects we shall be looking out for potential awards in sequence would be: (i) PSR Island A reclamation – by 1HCY21, (ii) Australia M6 highway – by 2QCY21, (iii) Sydney Metro West Central Tunnelling Package – by 4QCY21, (iv) Sydney Metro West Western Tunnel Package – by 2QCY22, (v) MRT3 – quickest would be late-CY21, and (vi) HSR – within the next 1.5 years if the final stop is at Johor (based on speculative reports) but could take 2-3 years if it cross over to Singapore.

As of 1QFY21, outstanding order-book stood at RM6.1b, mainly comprising KVMRT2 (RM4.0b or 66% of outstanding order-book) which would continue to drive earnings till-end FY21.

Reduce FY21E earnings by 20% to RM534m but keep FY22E earnings unchanged. Post results, we dial back our billings progression and margins assumption for property division while also trimming out traffic assumptions for the tolled highways in FY21. We anticipate property and concessionary earnings to gradually revert back to normalcy in the quarters ahead showcasing QoQ improvement in profitability.

Maintain OUTPERFORM with higher SoP-based TP of RM4.20 (from RM4.10) after incorporating a 100% probability of MRT3 going through post Budget 2021 instead of a 50% chance as previously imputed in our SoP. We continue to like Gamuda for their dominant position in the construction space in Malaysia which is bound to benefit from any pump-priming initiatives.

Risks to our call include: (i) total cancellation of HSR project, (ii) failure to secure any single Australian project, (iii) delay in PTMP due to insufficient state funding, and (iv) wide resurgence in a new strain of Covid-19 infections.

Source: Kenanga Research - 22 Dec 2020