Despite outperforming expectations in FY21, we downgrade Gamuda to Market Perform (from OP) with a lower TP of RM2.80 (from RM3.40) given that initial prospects from key infrastructure projects previously anticipated to take off may now take much longer to materialise in addition to less favourable terms. The MRT3 and PTMP which were supposed to be key earnings drivers post completion of MRT2 in FY22E has suffered a setback with the MRT3 financing structure requiring a fresh approach while PTMP is required to resubmit its EIA. Meanwhile, chances of Gamuda securing a project in Australia has also deteriorated as they had failed to win 2 out of the 4 projects tendered.

Above expectations. 4QFY21 CNP of RM214m led FY21 CNP to RM588m (+13% YoY), above ours/consensus expectations at 128%/106% respectively. The outperformance this quarter was led by their construction and property divisions which achieved superior margins as MRT2 (phase 1) saw the finalization of accounts during the quarter while property profits were boosted by Vietnam as it clears its backlog of building works previously built up following the delay of permits in 1HFY21. No dividends as expected.

Meanwhile, 4QFY21 property sales of RM0.7b lifted FY21 property sales to RM2.9b – below our/management’s target of RM3.3b/RM3.5b respectively. Our initial expectation of stronger Vietnam sales in 4Q did not materialise possibly due to the restrictions imposed there.

Highlights. 4QFY21 CNP of RM214m leapt 51% QoQ mainly due to the reasons mentioned above i.e. supernormal margins at its construction and property divisions. YoY, despite FY21 experiencing higher days of lockdowns (291 days vs. 84 days), CNP of RM588m was higher by 13% attributable to the same reasons mentioned.

Outlook wanes. Post briefing, we came away negative as initial prospects previously anticipated may now take much longer to materialise on less favourable terms.

Firstly, the MRT3 project which was supposed to be spearheaded by public funding could possibly fall on the private sectors’ shoulders to bear most of the financing. Previous management’s engagements with the government seem to have fallen through and a brand new approach being required to implement the MRT3. Despite Gamuda’s net gearing being healthy at 0.18x (as of FY21), the maximum they could possibly raise through borrowings is c.RM5b before hitting their net gearing limit of 0.7x. Note that these borrowings are also expected to fund the PTMP.

Next, the PTMP project which was earmarked to start reclamation works in Aug 2021 (already delayed from May 2021) has been dealt a severe setback. An unfavourable court ruling now requires Gamuda to re-submit their EIA (environment impact assessment) report which would require up to another 8 months before approval can be obtained. Worst still, a green light for the project is not certain given that the DoE is led by new faces which may lead to different outcome.

Meanwhile in Australia, Gamuda has failed in 2 out of their 4 bids and have incurred a whopping RM48m in bidding costs. Our earlier expectation of them securing 2 wins in Australia has now diminished. Consequently, we now only impute one win for FY22. The outstanding bids are the Sydney Metro West (West Tunnel) and the Sydney Metro Airport package.

Keep FY22E earnings and introduce FY23E earnings of RM543m (-8% YoY). The drop of earnings in FY23 is due to the completion of MRT2. Within our replenishment forecast, we have imputed reclamation works in PTMP to begin in late FY22 coupled with Gamuda securing one Australian project by mid-FY22. Any shortfall in expectations would lead to earnings downgrades.

Downgrade to Market Perform (from OP) with lower SoP-based TP of RM2.80 (from RM3.40) as we (i) reduce construction valuation to 14x (mean) from 16x previously and (ii) remove MRT3’s DCF valuations from our SoP given the uncertainty in commencement and implementation method.

Source: Kenanga Research - 30 Sep 2021