GAMUDA remains as the top pick amidst the negative sentiment in the construction sector arising from uncertain prospects and cost reviews of mega infrastructure projects. We believe that the negatives have already been priced in. Gamuda is trading at FY19E PER of 9.9x which is below its normal PER range of between 15-18x plus a dividend yield of 3.6%. BUY with a Target Price of RM4.30 implying a PER of 12.8x. 

Recently GAMUDA booked in RM304.4m non-cash flow impairment from SPLASH and Gamuda Water as they concluded their disposal of SPLASH to the Selangor state government. As Gamuda Water continues to maintain the water treatment plants in Rasa and Bukit Badong at lower re-negotiated rates, we are positive with the resolution as they would be able to use the cash proceeds to pare down debts, which would lower its net gearing to 0.4x level. Meanwhile, Selangor state had agreed to pay 90% of Gamuda Water's long due receivables. 

Currently, GAMUDA is working closely with the government in effort to bring down the cost for MRT2. Based on our sensitivity analysis, a RM8b reduction in the contract size to RM23.0b (from RM31.0b) will only result in a 4.4% reduction in FY19E net earnings; substantial risk to earnings is when the reduction is more than RM8.0b. 

GAMUDA achieved RM3.6b in property sales for FY18 bringing its unbilled sales to RM2.3b, which is sufficient to help them weather the uncertain times. Going into FY19, management is targeting sales of RM4.0b as they are optimistic with their new projects, i.e. Gamuda Cove, Gamuda Gardens, and Twentyfive7 which have received encouraging responses from the market. To recap, they recently won a land tender from Singapore Housing Development Board for the development of Executive Condo (EC) in Anchorvale with an estimated GDV of RM2.0b. 

Source: Rakuten Research - 3 Oct 2018