INVESTMENT HIGHLIGHTS

• Earnings fall below expectations

• Earnings hits a snag by higher expenses

• PTMP progress worrying

• Altogether, we maintain our NEUTRAL recommendation with an adjusted TP of RM5.05 per share

Earnings fall below expectations. Gamuda’s FY17 PATAMI came in lower at RM602m (-3.8%YoY) reflecting revenue compression and marginal pressure from concessions’ segment. However, its FY17 earnings came in mixed - meeting only 76.4% and 88.1% of ours and Street’s expectations of full year forecasts respectively. Gamuda’s FY17 results lagged our forecasts as we have assigned higher construction progress billings rate for the cumulative period.

Earnings hit a snag by higher expenses Earnings momentum has weakened mirroring the impact of longer termed contract swayed by steep increase of RM2.6bn (-52.9%yoy) of operating expenses. The cost compression stems from higher project mobilization expenses i.e .Pan Borneo and on-going underground works. We have been persistent to note that Gamuda‘s property project in Vietnam presents a healthy sales growth due to its expanding middle-class and will maintain our sales estimates for Vietnam projects. However, we are not optimistic on the sales of Gamuda’s project in Singapore due to lukewarm property mart.

PTMTP progress worrying. Despite a swelling orderbook of RM8.9bn, we are worried for the progress of Penang Transport Masterplan (PTMP). Currently, extension has been given by the Penang government to Gamuda for 12-months for the project. However, we reckon that regulatory issue such as the environmental impact assessment is an imminent obstacle to Gamuda’s participation in the PTMP. We favour the light rail transit line from the Penang International Airport to Komtar as the best package in the PTMP for Gamuda.

Recommendation. We maintain our NEUTRAL recommendation due to YTD share price run-up with an adjusted TP of RM5.05 per share based on sum-of-parts valuation (SOP). We refined our valuation to reflect changes in debt value and applied DCF valuation (WACC: 9.0%) instead as we think the prospect of FYE18 PER of 18x is demanding and does not reflect our sector view of marginal compression for the longer termed contracts.

Source: MIDF Research - 29 Sept 2017