INVESTMENT HIGHLIGHTS

• Gamuda reported RM1.0b worth of revenue in 3QFY19

• Construction earnings trimmed by -21.9%yoy in 9MFY19

• Property segment better in 3QFY19 compared to last year

• Gamuda’s board of directors accepted the offer on highway disposal which they agreed to be reasonable

• Second interim dividend of 6sen/share declared

• Maintain NEUTRAL with an unchanged TP of RM3.38

Gamuda reported RM1.0b worth of revenue in 3QFY19, a drop of -16.1% compared to last year. Cumulatively, it raked in RM3.1b revenue for 9MFY19, recording a marginal +2.0%yoy growth. Earnings for 9MFY19 were reported at RM521.2m, a decline by -17.8%yoy. The amount came in within our expectation but above consensus’ at 79.4% and 84.8% of respective annual earnings forecasts.

The stark decline was a result of SPLASH disposal. The lower reported earnings were due to the SPLASH sale. Gamuda has stopped recognizing earnings from SPLASH which directly translates to lower contribution from its Water & Concession segment. On that account, Gamuda posted -14.6%yoy lower net profits in 3QFY19 at RM176m compared to the same period last year.

Construction trimmed by -21.9%yoy in 9MFY19 as a result of the marked-down in value of MRT2’s contract. On quarterly basis, the group’s construction division reported -30.0%yoy lower earnings. It is worth pointing out that the overall cumulative progress at the end of May 2019 for the MRT2 elevated and underground works package were at 54% and 55% respectively. Moving forward, we expect the division earnings to be largely underpinned by the progress of MRT2, given its dominant share in Gamuda’s orderbook. As of April 2019, Gamuda’s unbilled job stood at RM10.0b.

Property segment was better last quarter. The segment reported +48.8%yoy higher earnings in 3QFY19, on the back of strong demand for its Viatnamese units. On cumulative basis, its PBT grew by +7.6%yoy to RM178.3m. It appeared that growth was largely driven by its overseas projects, as shown by the presales figures. In particular, the selling prices in Vietnam are trending up, which we expect to continue strengthening its overall margins.

Accepting the offer. Gamuda’s board of directors have accepted the offer which they agreed to be reasonable. It was noted that the disposal is yet to be completed, until other concession owners accept the offer with ultimate decision to be determined by the Malaysian government. Based on our estimates, disposing these assets will leave a vacuum to its long-term recurring income by approximately 25-30% on annual basis. Upon successful completion of the takeover, we estimate that it will impact FY20 earnings by approximately -12.8%.

Near-term priority will be on PTMP. PTMP was expected to take off in the middle of CY20, which will contribute to earnings visibility in the long-term for Gamuda. Management was positive on the current progression, with the financing concerns appears to be fairly allayed, as some key funding issues could soon be resolved. It was expected that its participation in PTMP will provide recurring income from the PDP fees structure, which we take positively to at least cushion the impact from the loss of stable highways cash flow.

No change to estimates. We make no changes to our estimates for now.

Dividend of 12sen/share. Gamuda has declared a second interim dividend for the financial year ending in July 2019. It carries a value of 6sen/share which brings the total declared amount at 12sen/share. Accordingly, it equates to 56.8% of dividend payout ratio. Special dividend is in the cards should its highways divestment succeed.

Maintain NEUTRAL. We arrived at a TP of RM3.38 based on our SOP-derived valuation. This was based on 20% discount to RNAV/share, implying 13x PE to Gamuda’s FY20 EPS. Gamuda’s share price has risen by +61.0%YTD, riding on the recovery momentum resulting from the returns of huge scale projects which has partially revived the sentiment on construction stocks. While this revival shed positive light on the sector, we believe that its prospect has largely been priced in.

Source: MIDF Research - 28 Jun 2019