INVESTMENT HIGHLIGHTS

• MMC-Gamuda to continue MRT2 UG project

• A set of revised cost structure could weigh down margin

• Downside risks include adjustment to margin and extension of completion date

• Maintain BUY with adjusted TP of RM2.89

Latest updates. KVMRT2 UG portion is still running, albeit a cost reduction of RM3.6b which is agreeable by both key parties - MoF and Gamuda-MMC. This was subsequent to revision done by the JV Co, whereby the earlier cost-cut was not deemed sufficient by the government. The overall project will now carry a value of RM30.5b.

A set of revised cost structure could weigh down margin. The project’s continuation seemed as a rational avenue for the group to manage the risk at hand. Recall that the total construction cost currently worth RM30.5b, after a significant reduction by RM8.8b. The hefty haircut arrived and offered by Gamuda-MMC means that total earnings contribution would probably be marginal once completed as a result of widening margin compression.

Impact to earnings. Given the revision, we are expecting a conservative sum of RM49.2m from the UG contract on top of Gamuda’s annual profit estimate. This is taking into account the downside risks namely adjustment to margin and the extension of completion deadline.

Recommendation. Our adjusted TP at RM2.89 constitutes a BUY call on the stock. Moving forward, we are feeling sanguine on the prospect of property segment which is on; 1) the completion of construction works at 661 Chapel Street, Australia and 2) potential of better take-up rates in the domestic market for new townships and

Source: MIDF Research - 29 Oct 2018