INVESTMENT HIGHLIGHTS

• The government has begun talks with Gamuda Bhd to negotiate the buyout of four highway concessions

• The highways involved are Lebuhraya Damansara Puchong (LDP), SPRINT Expressway (SPRINT), Lebuhraya Shah Alam (KESAS) and SMART

• Highway concessions have been the source of stable income to Gamuda

• We think future acquisitions (if implemented), will likely be done in phases

• However, we opine that it is too early to ascertain the entirety of its impact

• However, the news will likely elevate concerns on the share price

• Downgrade to NEUTRAL with unchanged TP of RM2.89

Recent news on toll concessions. According to a press statement by the Prime Minister’s Office (PMO), the government has begun talks with Gamuda Bhd to negotiate the buyout of four highway concessions which the company has substantial stakes in. The objective was to abolish toll collection mechanism at these highways. The four highways involved are Lebuhraya Damansara Puchong (LDP), Sistem Penyuraian Trafik KL Barat Expressway (SPRINT), Lebuhraya Shah Alam (KESAS) and SMART.

Highway concessions have been the source of stable income to Gamuda. It has significant stakes in the highway concessions, i.e. KESAS (at 70%), SPRINT (at 52%), SMART (at 50%), and LITRAK (at 44%). Given the tolled mechanism in these highways, we noted that its concessions assets have been contributing stable income to the Gamuda group. In totality, the concession segment made up about 41% of FY18 PBT. Upon full acquisitions, this would mean a notable loss of stable recurring income to the group.

What we think on the news. We believe the impact to Gamuda’s earnings is net negative, as the move will result in earnings vacuum. However, we opine that it is too early to ascertain the impact, as we are still short on details. On that account, our forecasts on the group earnings remain unchanged until further development on the acquisitions.

Source: MIDF Research - 25 Feb 2019