INVESTMENT HIGHLIGHTS

• Performance weighed down by one-off losses…

• …but core business continued to perform well

• Operationally strong in key segments i.e. constructions

• Downgrade with an adjusted TP of RM3.15

4Q reported losses, but core profit displayed its mettle. The group posted a net loss of -RM101m in 4QFY18, contrarian to a profitable quarter in the same period last year. The negative deviation was steered by one-off losses on disposal of Splash (-RM300m) and impairment on investment in Gamuda Water (-RM4m). We arrived at a core net profit of RM203m (+1.0%yoy) by stripping off these one-off items. Cumulatively, the group’s business ended the year on a positive note, recording +16.8%yoy higher core net profit - at the tune of RM818.4m for FY18. Accordingly, the cumulative core net profit formed 100.9% and 103.1% of ours and consensus’ full year estimates respectively.

Operationally strong. FY18 revenue came in strong; recording RM7.2b (+25.7%yoy) as result of robust property sales which emerged as the highest contributor of segmental revenue growth at RM2.5bn (+38.7%yoy). The growth was propelled by sales in both Vietnam (Celadon City) and Singapore (GEM Residences) markets. Notably, overseas sales contributed about 70% of the group’s property revenue. Consequently, we saw the group’s FY18 core net profit was largely represented by this segment, amounting to RM76m.

Construction revenue backed by strong orderbook. Construction segment continued to post growth in revenue, of RM4.1bn (+19.5%yoy) in 4QFY18. Largely, the growth was attributable to the higher work progress from the KVMRT Line 2 project, whereby the Group is the PDP and sole underground works package contractor. Moving forward, we expect construction revenue to be resilient backed by the on-track progress of Pan Borneo Sarawak Highway project.

Recent developments on land acquisition. Gamuda has recently received the Letter of Award (28.02.18) by the Housing Development Board (HDB) of Singapore confirming their acceptance of the tender submitted by Gamuda with Evia Real Estate (8) Pte Ltd (“Evia”). The tender was submitted to acquire the land parcel in Singapore’s Anchorvale Crescent site, earmarked for executive condominium development. The tender price was SGD318.9m (~RM963.0m), which translates to SGD576.2psf. The respective stakes stakes for the land acquisition shall be on the basis of 50% Gamuda, 30% Ho Lee Group and 20% Evia. Based on the 50% stake, the group would have spent approximately RM481.5m for the land acquisition. The acquisition is set to be financed by a combination of internal funds and also bank borrowings. Notably, the transition is expected to complete by 4Q18. Consequently, this acquisition will mark another positive development by Gamuda as the group strives towards diversifying its market exposure. This is positive in the medium term, hedging against any downside risks in the domestic market and tapping into Singapore’s sturdy property mart.

Earnings forecast unchanged. Given the core net income and its unbilled orderbook of c.RM13.0bn we maintain our earnings forecasts at this juncture.

Recommendation. Downgrade to NEUTRAL with an adjusted TP of RM3.15 per share by rolling over our FYE20 EPS to 13.0x price-to-earnings ratio to reflect our defensive stance on the sector by assigning a lower multiples which commensurate with KL Construction Index insipid multiples and valuation prospects.

Source: MIDF Research - 1 Oct 2018