Earnings to beat expectations

• FY10 result expected to beat our forecast
• Still bidding for MRT, LRT and Qatar jobs
• BUY, raised TP to RM4.40

FY10 to beat forecast. Gamuda's full year result due 28 September will likely beat our FY10F net profit of RM270m by 5-10%; our estimate is at the low end of consensus forecasts. 4QFY10 net profit should exceed 3QFY10's RM73m to register the fourth consecutive quarter of growth. This would be driven by continued improvement in construction margins q-o-q (average of 1ppt) and RM600m unbilled sales. FY10 property sales was a record RM800m (vs RM500m in FY09) and the momentum has carried over to the first 2 months of FY11. Gamuda is guiding for
RM880m local property sales for FY11 and RM820m from Vietnam. There is a risk it might not meet the Vietnam forecast because Yenso Park has not received the residential land parcel titles. But we take comfort that the market has yet to factor in any sales.

MRT and other projects. The next milestone for the RM36bn MRT project is the result of two independent consultants' report by end-September - we understand the feedback had been positive. We remain convinced this project will take off (See sector report dated 3 September).
The key risk for the MMC-Gamuda JV is the presence of foreign contractors if the tunneling portion is awarded under Swiss Challenge method. But foreigners are unlikely to be able to match the cost structure of locals, with the double tracking project setting a precedent. A realistic start date will be in mid-2011 where the tunneling portion will be part of Phase 1 (2011-2016) with the project reaching 70% completion. Other projects in the pipeline are the LRT extensions where Gamuda submitted a bid, LCCT runway and RM1.5bn Durkhan highway in Qatar.

BUY, raising TP to RM4.40. Gamuda remains our high conviction pick. We raised our TP to RM4.40 after factoring in the recent purchase of land along Jalan Pudu (RM600m GDV), where Gamuda plans to build shop offices and service apartments. At 19x 1-year forward PE and 2.1x
P/BV, valuations do not seem cheap, but they are at mean levels. We expect valuations to at least test 1SD above mean and for it to trade at premium valuations to its peers should it be awarded the MRT project. In the 2-months leading to the award of its RM12.5bn double tracking project, it traded at average 1-year forward PE of 29x and peaked at 39x a month later. Gamuda's investability will also gain traction having replaced Tanjong in the FBMKLCI.

Report by
HWANGDBS Vickers Research Sdn Bhd (128540 U)