Following the government’s bid to take over Gamuda’s toll road concessionaires, Macquarie Equities Research (MQ Research) reiterates its Outperform rating on this counter with a revised target price. With the latest development, MQ Research has further raised Gamuda’s order win prospects ahead of the Penang Transport Master Plan (PTMP) kick-off.

Event

• MQ Research reiterates its Outperform rating on Gamuda with a revised target price (TP) of RM4.30 (16x implied forward price to earnings (PE)) following the government’s bid to take over Gamuda’s toll road concessionaires. While the acquisition is subject to cabinet approval, MQ Research believes the transaction will receive a greenlight from shareholders, given that the acquisitions were priced at RM1bn above Gamuda’s book values attributed to the toll roads.
• MQ Research believes by purchasing the toll roads the government is also indirectly funding the working capital needed to commence the PTMP project. MQ Research therefore has further raised Gamuda’s order win prospects ahead of the PTMP kick-off.

Impact

• Toll road divestments brings RM2.36bn cash to Gamuda – special dividend on the cards? The equity value attributed to Gamuda from the toll road divestments will bring a total cash amount of RM2.36bn to Gamuda by 1HFY20E – this is in line with MQ Research’s valuations of the toll roads at RM2.24bn. MQ Research believes Gamuda will consider to declare a special dividend following these divestments, especially after failing to do so post the Syarikat Pengeluaran Air Selangor (SPLASH) sale to the government about a year ago for an initial fee of RM1.9bn. MQ Research baked in a special dividend of 15sen/share in FY20E following these divestments.
• Another notch for PTMP. Note that Gamuda and the Penang State government are required on a best-effort basis to raise up to RM1.5bn each to kick off the PTMP project. MQ Research believes Gamuda will carve out RM1.5bn from the sales proceeds of RM2.36bn for this purpose. Against this backdrop, MQ Research has finally included PTMP in its order win estimates, since the PTMP was launched in 2016.
• On top of a potential RM5bn tunneling works, MQ Research estimates Gamuda will get a 3% project delivery partner (PDP) fee from the Phase 1 of the PTMP, which includes reclamation works, LRT and Pan Island Link 1 (PIL1) projects – with an estimated combined costs of RM15bn-20bn. MQ Research estimates PTMP to bring meaningful contributions to Gamuda’s order wins starting in FY21E onwards.

Earnings and Target Price Revision

• Removed Gamuda’s toll road earnings estimates starting from 3Q20E onwards. While FY19-22E earnings per share (EPS) were revised by -3%/-24%/-10%/-13%, respectively, the TP was raised to RM4.30 on higher order win estimates.

Price Catalyst

• 12-month price target: RM4.30 based on a Sum of Parts methodology.
• Catalyst: Positive announcements from the PTMP project

Action and Recommendation

• Outperform rating reiterated.

12-month Target Price Methodology

• GAM MK: RM4.30 based on a Sum of Parts methodology

Source: Macquarie Research - 26 Jun 2019