Gamuda recently announced its 4Q19 financial results ended 31 July 2019, reporting an increase of 23% YoY in its revenue to RM1.5bn. Meanwhile, its cumulative FY19 adjusted profit after tax (PAT) recorded at RM682mn, tracking in line with Macquarie Equities Research (MQ Research) and consensus estimates. In a report released this morning (30 Sep), MQ Research summarized the overall results while discussing Gamuda’s plan to acquire Martinus Rail, an Australian rail company.

Event

• Gamuda reported its 4Q19 results with an adjusted PAT of RM161mn (-22% YoY, -9% QoQ) backed by a total revenue of RM1.5bn (+23% YoY, +45% QoQ). On a cumulative basis, FY19 adjusted PAT was at RM682mn (-17% YoY) tracking in line with MQ Research and consensus estimates at 100% and 101%, respectively. Revenue in FY19 was at RM4.57bn (+8% YoY) tracking ahead of MQ Research and consensus estimates at 119% and 106%, respectively.

• During the results briefing, management announced that it will be acquiring a 50% stake in a small rail company based in Australia called Martinus Rail. The owner – Treavan Martinus ­– issued new shares to Gamuda and diluted his ownership from 100% to 50%. According to management, when the deal is concluded (in 2 months’ time) the acquisition value will be very small; it could be less than the bourse’s announcement threshold – less than 5% of Gamuda’s shareholders’ funds. There is no value guided at this juncture.

Impact

• Construction: Orderbook balance remained strong at RM9.2bn. Overall in FY19, the division saw the full impact of MRT2 cost-cutting measures with its earnings before interest and taxes (EBIT) margin dropping to 9.2% from 13.1% in FY18. Gamuda’s main project – MRT2 is now already 49% completed and is set to be partially commissioned by mid-2021 and fully commissioned by early-2022. With MRT2 completing soon, MQ Research believes talks of the MRT3 project, poised to be valued at RM20bn++, will begin in 2020. During the transition from MRT1 to MRT2, the contract winners of MRT2 was announced almost a year prior to MRT1’s completion.

• Property: Gamuda recorded a total pre-sales of RM3.07bn (-14.5% YoY) as weaker sales in Malaysia has dragged the overall division’s performance. The achieved sales is short of management’s target of RM3.8bn but in line with MQ’s FY19 sales estimates of RM3.09bn. Profit from this division is still well supported by the Vietnam operations, as MQ Research saw stronger USDMYR has led to higher margins in FY19 (EBIT at 12.6% in FY19 vs. 10.6% in FY18).

• Concession: Management guided that the talks on the tollroad divestments was extended and the deadline is set at 31 October 2019. Management said that if the deal did not happen, the progress of Penang Transport Master Plan (PTMP) will be delayed and that Gamuda may have to gear up or find another partner to co-fund the initial working capital requirements of the project. Management remains adamant that support from federal government will be there for PTMP.

• Australian expansion: According to management, it is looking to tap into the AUD20bn rail-based projects in Australia. From the industry wallet size of AUD20bn, Gamuda is looking to tender up to AUD8bn of projects consisting track works and civil works, guiding that profit before tax (PBT) margins could be well around 5-8%. While Martinus Rail is small, Gamuda believes the company brings ample access for Gamuda to start the bidding process of the potential rail projects in Australia. In Australia, Gamuda will face a strong competition from John Holland, a renowned construction giant in Australia, which was bought by China Communications Construction Company (CCCC) in April 2015.

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 - 30 Sept 2019