Best transportation proxy

Best proxy to transportation infrastructure. Gamuda is our top large cap pick in the sector, as it is the best proxy to a slew of upcoming transportation-related projects. Its strong reputation for MRT Line 1 and PDP appointment for Penang Transport Master Plan (PTMP) provide it with leverage for other large- multiplier projects such as LRT 3, Gemas-JB double tracking and Pan Borneo Highway Sabah.

Large multi-year projects ensure strong earnings visibility. Gamuda?s outstanding orderbook now stands at RM8.9bn which does not include the PDP fees for MRT Line 2 aboveground works. The final contract value for the whole project will only be known once all the packages are awarded which will likely be about RM30bn. FY17F will be the start of a new earnings growth cycle as maiden contribution from MRT Line 2 starts to filter through. We expect margins for MRT Line 2 tunnelling to at least match that of MRT Line 1 given its depreciated tunnel boring machines while the project value is also higher on a per km basis. The medium term pipeline also needs promising with the High Speed Rail, MRT Line 3 and East Coast Railway Link.

Potentially special dividends now from Splash Sale? There are expectations for the Splash deal to be concluded in 2QCY17 at close or a small discount to its book value of c.RM2.8bn. There could be special dividends now especially if there are further delays in the Penang Transport Master Plan (PTMP). This would somewhat compensate investors for the earnings void. Over the longer term, the PTMP will be positive as Gamuda could secure long-term construction earnings and a firm footing in Penang?s property market.

Valuation

We maintain our BUY rating and SOP-derived TP of RM5.80. We have accounted for the dilution of warrants and corresponding increase in cash raised from full conversion while also assuming some marginal wins outside of MRT 2.

Key Risks to Our View

High raw material price. The tunnelling portion of MRT Line 2 is its largest project and is susceptible to fluctuations of raw material prices, particularly for steel. Nonetheless, we think this is partly mitigated by the higher contract value on a per km basis.

Source: Alliance Research - 12 Jan 2017