GAMUDA has been offered to dispose their four tolls for RM2.3b (effective equity stake) which would turn it RM0.6b net cash (from RM1.7b net debt). We were positively surprised by the offer as the sale price of RM2.3b is higher than our estimated valuation of RM2.1b for these tolled highways and Gamuda will be able to channel the proceeds for higher growth projects moving forward. Post deal, we reduce FY23E earnings by 27% on loss from toll contributions. Maintain OP with higher TP of RM4.00 (from RM3.70).

Offer to acquire Gamuda’s tolled highways. Amanat Lebuhraya Rakyat Bhd (ALR) – a not-for-profit private company has proposed to acquire completely Gamuda’s four tolled highways at an Enterprise Value of RM5.48b (Equity value of RM4.432b). ALR will be raising funds through sustainable Sukuk, and Gamuda’s management is confident that this Sukuk will be rated AAA by RAM and MARC – providing an estimated 4.33% yield to potential holders. Timeline of sale is expected within the next 4 months but management is targeting to have it sealed within 3 months (end-June 2022).

High probability of success. We believe this deal has a high probability of success and would not face as much backlash compared to the deal offered by the Ministry of Finance back in 2019. This is mainly because the Government is not a party to this transaction unlike the last deal which they were required to provide government guarantees. Also, this deal saves the government RM4.3b worth of toll compensations required for the rest of these four concessions and the public gets to enjoy flat toll charges throughout the tolls’ remaining tenure.

Usage of proceeds. Based on Gamuda’s respective stakes in the four highways, they will be receiving a total of RM2.33b in proceeds from this sale. According to management, these proceeds would be used for: (i) debt reduction, (ii) investing in new businesses, (iii) fund PFI projects i.e. MRT3 and flood mitigation projects, and (iv) a special dividend distribution. Nonetheless, the quantum of allocation has not been finalised yet.

Loss of toll earnings to be supplemented in FY24. Post toll sale, Gamuda will lose its recurring income of c.RM170m/annum (as per management’s guidance) leaving an earnings vacuum left by the concession division in FY23. Nonetheless, management guides that this loss of earnings would be regained in FY24 through stronger construction and property division where they allude to RM1.0b bottom-line target in FY24 (split between construction: RM0.5b and property: RM0.5b).

While we believe it’s highly possible for construction profits to hit RM0.5b in FY24 (RM6b revenue at 8% PAT margin), we find the property earnings projection could be overly optimistic. This is because in order to achieve RM0.5b bottom-line for its property division, they had projected property sales of RM6b in FY24 – a bullish target in the current environment. For FY22, management is targeting RM4.0b worth of new sales while we are only targeting RM3.7b.

Overall positive of the deal as the sale proceeds of RM2.334b is higher than our DCF valuation of RM2.083b within our Sum-of-Parts (or 10.0 sen higher per share). With this deal, Gamuda will be able to absolve itself from traffic volume risks should government halt compensation. Also, Gamuda is expected to gain RM1.0b from this deal and turn net cash of RM0.6b post deal. As of 2QFY22, Gamuda sits on net debt of RM1.7b.

FY23E earnings reduced by 27%. Post deal, we reduce FY23E earnings by 27% after accounting for the loss of contributions from these four tolled highways partially offset by some interest savings from reduced borrowings. Maintain OP with higher SoP-TP of RM4.00 (from RM3.70) after adjusting for the higher-than-expected valuations for its four tolled highways coupled with higher construction PER of 18x (from 16x) upon higher chances of securing privately funded government infra projects on much stronger balance sheet.

Source: Kenanga Research - 5 Apr 2022