We maintain our Buy call, forecasts and fair value of RM4.49 on strong prospects backed by a healthy outstanding construction orderbook and construction orderbook pipeline, and strong property sales in Malaysia, particularly, from Iskandar.  The significant roles played by Gamuda in the Klang Valley MRT project make it undisputedly the best proxy to public infrastructure spending in Malaysia.

¨      MYR10bn jobs in sight.  Gamuda has set its sights on local jobs worth about MYR10bn over the immediate term comprising: (1) The Langat 2 water treatment plant (MYR1.5bn); (2) The tunneling package for Line 2 of the Klang Valley MRT project (MYR4.5bn); and (3) The Southern (Gemas – Johor Bahru) Double Tracking project (MYR4bn). 

¨      No more outstanding material contract dispute.  Gamuda said that its share of losses amounting to about MYR119m from two unfavourably ruled arbitration cases with Wayss & Freytag (a subcontractor for the SMART tunnel project) and Bahrain Asphalt Establishment (a subcontractor for the Dukhan Highway project in Qatar) will be recognised in the coming 3QFY13 results.  On a brighter note, Gamuda said that it does not have any more outstanding material contract dispute with any client/supplier. 

¨      Property: Johor strong, Vietnam a standstill.  Gamuda is on track to meet its FY13 property sales target of MYR1.35bn in Malaysia.  Already, in the first eight months of FY13, it achieved MYR950m property sales with Horizon Hills in Iskandar being the star performer, contributing about MYR550m.  However, Gamuda said that the near-term outlook of the property market in Vietnam remains uncertain.

¨      Investment case.  Post the 13^th general election, we believe investors should refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle.  We like Gamuda as: (1) It is the best proxy to public infrastructure spending in Malaysia; and (2) We believe the Sg Buloh – Kajang (SBK) MRT Line project has gone beyond “the point of no return”, given the massive physical works that have already been carried out on the ground.  Fair value is MYR4.49.  Maintain Buy.

Setting Sights On MYR10bn Jobs

Highlights.  Key takeaways from our group meetings with Gamuda during our Asean and Hong Kong Corporate Day on 25 Apr 2013 are: (1) Gamuda has set its sights on local jobs worth about MYR10bn over the immediate term; (2) Gamuda said that it does not have any more outstanding material contract dispute with any client/supplier; and (3) Gamuda already achieved property sales of about MYR950m in the first eight months of FY13 (vis-à-vis its full-year target of MYR1.35bn), driven predominantly by MYR550m sales from Horizon Hills in Iskandar.    

MYR10bn jobs in sight.  Gamuda has set its sights on local jobs worth about MYR10bn over the immediate term comprising;

1. The Langat 2 water treatment plant (MYR1.5bn), of which we understand that, while not widely publicised, Gamuda has indeed already emerged one of the two final bidders for the project;
2. The tunneling package for Line 2 of the Klang Valley MRT project (Gamuda’s half share amounts to about MYR4.5bn), expected to be awarded in mid-2014; and
3. The Southern (Gemas – Johor Bahru) Double Tracking project (Gamuda’s half share amounts to about MYR4bn), expected to be awarded by in 4Q2013.

Gamuda also said that it is currently working on a proposal on the much-talked-about KL-Singapore high-speed rail (that reportedly will cost MYR30-50bn), to be submitted to the Government.  Gamuda is mindful that unlike the Klang Valley MRT project, it does not have an edge over rivals as the KL-Singapore high-speed rail is not its brainchild and the project does not require massive tunneling where Gamuda’s key strength lies.  Gamuda said that a key caveat to all these potential jobs is no substantial change to the nation’s political landscape post the 13^th general election.

No more outstanding material contract dispute.  Gamuda said that its share of losses amounting to about MYR119m from two unfavourably ruled arbitration cases with Wayss & Freytag (a subcontractor for the SMART tunnel project) and Bahrain Asphalt Establishment (a subcontractor for the Dukhan Highway project in Qatar) will be recognised in the coming 3QFY13 results.  On a brighter note, Gamuda said that it does not have any more outstanding material contract dispute with any client/supplier.  It stressed that it had acted in the best interest of the company when it terminated Wayss & Freytag as this tunneling subcontractor was believed to be “eight months behind schedule” at some point, putting turnkey contractor Gamuda at risk of having to pay “LAD (liquidated and ascertained damages) (for late delivery) amounting to about MYR0.5m per day”.  Meanwhile, Gamuda conceded that Bahrain Asphalt Establishment had strong grounds based solely on the fact that resources it mobilised to the site were left idle for almost two years due to the delay in the project.  While the delay stemmed very much from the project owner, i.e. the Qatari government, Gamuda by virtue of its role as main contractor, was still directly liable for losses suffered by the subcontractor Bahrain Asphalt Establishment.  Gamuda is currently still in negotiation with the Qatari government for potential claims arising from the delay.

Property: Johor strong, Vietnam a standstill.  Gamuda is on track to meet its FY13 property sales target of MYR1.35bn in Malaysia.  Already, in the first eight months of FY13, it achieved MYR950m property sales with Horizon Hills in Iskandar being the star performer, contributing about MYR550m.  However, Gamuda said that the near-term outlook of the property market in Vietnam remains uncertain due to a weak economy, the banking crisis and expectations of stable/falling property prices, and as such, “buyers are taking their sweet time before committing to purchases”.  YTD, Gamuda has achieved very minimal sales in Vietnam which means its FY13 sales target of MYR50m in Vietnam is at risk.  No change to our earnings forecasts that assume property turnover and EBIT of MYR800-1,200m and MYR200-290m per annum in FY13-14.

Forecasts.  Maintained.

Risks to our view.  These include: (1) Risk associated with the Sg Buloh – Kajang (SBK) MRT Line project including delays, cost overrun and potential changes to the project delivery partner (PDP) terms; (2) Delays in the rollout of Lines 2 & 3 of the Klang Valley MRT project (Gamuda guided Line 2 to be awarded in mid-2014); and (3) Prolonged slowdown in the property market in Vietnam.

Investment case.  Post the 13^th general election, barring a substantial change to the nation’s political landscape, we believe investors should refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle.  We like Gamuda as: (1) It is the best proxy to public infrastructure spending in Malaysia; and (2) We believe the SBK MRT Line project has gone beyond “the point of no return”, given the massive physical works that have already been carried out on the ground.  Fair value is MYR4.49 based on “sum of parts” (see Figure 2), valuing its construction business at 15x 1-year forward earnings, at a premium to our 1-year forward target PER for the construction sector of 8-13x to reflect Gamuda’s large market capitalisation and high share liquidity.  Maintain Buy.

Source: RHB