GAMUDA has been offered to dispose of their four tolls for RM2.3bn (effective equity stake) which would turn it RM0.6bn net cash (from RM1.7bn net debt). We were positively surprised by the offer as the sale price of RM2.3bn is higher than our estimated valuation of RM2.1bn for these tolled highways and Gamuda will be able to channel the proceeds for higher growth projects moving forward. Post deal, we reduce FY23E earnings by 27% on loss from toll contributions. BUY with a TP of RM4.00.

Amanat Lebuhraya Rakyat Bhd (ALR) – a not-for-profit private company has proposed to acquire completely Gamuda’s four tolled highways at an Enterprise Value of RM5.48bn (Equity value of RM4.432bn). Timeline of sale is expected within the next 4 months but management is targeting to have it sealed within 3 months (end-June 2022). We believe this deal has a high probability of success. This is mainly because the Government is not a party to this transaction unlike the last deal which they were required to provide government guarantees. Also, this deal saves the government RM4.3bn worth of toll compensations required for the rest of these four concessions and the public gets to enjoy flat toll charges throughout the tolls’ remaining tenure.

Based on Gamuda’s respective stakes in the four highways, they will be receiving a total of RM2.33bn in proceeds from this sale. According to management, these proceeds would be used for: (i) debt reduction, (ii) investing in new businesses, (iii) fund PFI projects i.e. MRT3 and flood mitigation projects, and (iv) a special dividend distribution. Nonetheless, the quantum of allocation has not been finalised yet.

Post toll sale, Gamuda will lose its recurring income of c.RM170m/annum (as per management’s guidance) leaving an earnings vacuum left by the concession division in FY23. Nonetheless, management guides that this loss of earnings would be regained in FY24 through stronger construction and property division While we believe it’s highly possible for construction profits to hit RM0.5bn in FY24 (RM6bn revenue at 8% PAT margin), we find the property earnings projection could be overly optimistic in the current environment. For FY22, management is targeting RM4.0bn worth of new sales while we are only targeting RM3.7bn.

Source: Rakuten Research - 5 Apr 2022