SPLASH, a 40%-associate of GAMUDA, has received a take-over offer at RM2.55b from Air Selangor. We are positive as the current offer is seen to be more reasonable compared to the previous offer that GAMUDA rejected back in 2014. BUY with a Target Price of RM4.35 pending more details. Once this is resolved, GAMUDA would be able move on and focus on future projects like the Penang Transport Master Plan, and MRT3. 

GAMUDA announced that its 40%-owned associate SPLASH has received a take-over offer from Air Selangor for RM2.55b. The proposed acquisition of SPLASH by Air Selangor includes 100% of SPLASH's ordinary shares and 100% of SPLASH's redeemable unsecured loan stocks, of which RM1.9b to be paid as upfront payment while the remaining RM650.0m will be settled over a 9-year instalment scheme as part of their SPA terms. 

The offer price of RM2.55b from Air Selangor represents a 26% discount to its net book value of RM3.5b as of Dec 2017. However, it is still higher than the net offer back in 2014 of RM250.6m. We believe that the Selangor state government stands to benefit from a decent deal should GAMUDA choose to accept their offer before 10th August 2018. The offer price of RM2.55b is still short of our expectation of RM3.1-3.5b, which represents 0.9-1.0x of its book value. However, we believe GAMUDA should consider taking up the offer in light of SPLASH's ballooning receivables that is long due. 

If the deal goes through, we can expect Gamuda's net gearing of 0.55x to come off to 0.42x. However, the possibility for a special dividend is slim as management might conserve cash for future projects. GAMUDA's outstanding order-book comfortably stands at RM6.4b with 3-year earnings visibility. However, should GAMUDA choose to accept the offer, it would have a negative impact to its FY19E earnings, as they would be incurring losses of >RM300.0m from the disposal of SPLASH coupled with c.RM100.0m of core earnings contribution from SPLASH. 

Source: Rakuten Research - 6 Aug 2018