INVESTMENT HIGHLIGHTS

• The government is offering a sum of RM4.5b to take over four toll highways currently owned by Gamuda

• Gamuda’s effective stakes carry an estimated total value of RM2.4b, that is equivalent to 95.6sen /share

• Upon successful acquisitions, Gamuda’s cash position will be significantly enhanced

• Maintain NEUTRAL with SOTP derived TP of RM3.38

The government is offering a sum of RM4.5b to take over four toll highways currently owned by Gamuda. The offer was effective until 12 July 2019, with completion subject to the cabinet’s approval, among others.

Gamuda’s ownerships in the highways are made up of LITRAK (43.6%), KESAS (70%), SPRINT (51.8%) and SMART (50%). Accordingly, Gamuda’s effective stakes in the aforesaid highways carry an estimated total value of RM2.4b, equivalent to 95.6sen /share.

The consideration comprises cash, which we think could likely be disbursed in the form of an upfront payment that is followed by gradual instalments. Notably, we think the offer price was reasonable as the amount did not deviate much from our previous estimates at RM2.50b. Prior to the offer announcement, we viewed the potential takeover rather negatively. This was due to the possibility of the highways being valued at construction cost instead of DCF, which would likely ignore its economic value, hence undervaluing the asset. However, based on the offer price revealed, it was likely that the price was reached based on the market norms.

Impact to Gamuda moving forward. Upon successful acquisition, Gamuda’s cash position will be significantly enhanced, providing significant liquidity to its asset profile. We opine the potential cash proceeds could be utilized for other projects, which includes the funding its large infrastructure projects in Penang. At this juncture, we do not rule out the prospect of special dividend as to compensate for the loss in a stable income source going ahead.

On operational fronts, a significant loss in recurring income is inevitable, leaving the company with a rather cyclical business model which comprises construction and property. In recognition of this, we understand that management is zeroing in to acquire or invest in new ‘recurring income’ businesses in the future. To recall, we estimate that the highway concessions (pending divestments) have generated about an average of RM200m of stable earnings on annual basis. At PBT level, this would account for 25-30% of its total annual earnings. Taking the offer would leave a clear impact to its bottom lines, leaving a vacuum to its long-term recurring income.

Collecting a big sum upfront. On a positive note, the takeover move is a windfall for Gamuda considering that some of its concessions are already nearing expiration and not all of its highways are profitable. Hence, the offer by government for takeover could also be seen as good opportunity to exit. Another factor to consider is the huge investment spent on public transport by the government. This will eventually discourage urban dwellers to use the city roads, hence reducing the traffic on these highways.

No change to forecasts. Following this news, we make no change to the earnings forecasts for FY19 and FY20, pending further details from management.

Maintain NEUTRAL. We arrived at a TP of RM3.38 based on our SOP-derived valuation. This was based on 20% discount to our RNAV/share, implying 13x PE to Gamuda’s FY20 EPS. Gamuda’s share price has risen by +65.8%YTD, riding on the momentum of recovery following the returns of huge scale projects which has partially revived the sentiment on construction stocks. While this revival denotes positive tone on the sector, we believe that its prospect has largely been priced in. On top of that, the impact at company level is yet to be seen as the current execution of the restored projects is still at early stage. Unless tangible catalysts begin to emerge, we believe Gamuda’s current valuation still constitutes a NEUTRAL call.

Source: MIDF Research - 24 Jun 2019