Yesterday, we had a lunch meeting with Gamuda’s MD Dato’ Lin and its management. It appears MRT Line 2 has been finalized and looks forward to cabinet approval in July-2013, after which, we can expect more new orders from the tunnelling portion and PDP. We maintain our estimates and reaffirm our positive outlook on Gamuda after the meeting. Gamuda’s share price has risen 29.9% YTD and post GE, we have since upgraded the Construction Sector to OVERWEIGHT (8-May-13) where Gamuda’s TP was revised upwards to RM5.20 from RM4.49, following GE’s outcome which favours Gamuda. We reiterate our recommendation on Gamuda and it is our Top Pick for the Construction sector due to it being a direct proxy to the booming rail-infrastructure industry. The key takeaways from the yesterday’s meeting are as follows:

MRT Line 2 to be announced soon! Management shared with us that the MRT Line 2 official alignment has been finalised. MRT Line 2 (or more widely known as the “Radial Line”) will be stretched from Sungai Buloh – Serdang – Putrajaya. It will be built in 2 phases of which Phase 1 spans from Sungai Buloh – Serdang while Phase 2 is the remaining stretch covering Serdang – Putrajaya (Precint 14). Based on MRT1’s price tag, the 56km MRT2 should cost around RM25b. The project is now ready for cabinet approval.

Timeline. Management expects the MRT2 alignment to be approved by cabinet in July 2013 and the project will only commence works 2 years later (mid-2015). The 2 years lead time is required for the completion of land acquisitions, public feedbacks, tender processes and appointment of design consultants and PDP. The contract awards also should be announced in early 2015, which is later than we had earlier expected (early-2014).

Potential new orders from MRT2 tunnelling and PDP. Nonetheless, we are not overly concern with the longer-than-expected timing of MRT2 awards as Gamuda still has strong orderbook of

Gemas-JB EDT or HSR? The management also updated that the government has yet to decide whether to roll-out the Southern Gemas-JB EDT project. The EDT tracks maybe “redundant” if the High Speed Rail (HSR) is in place, which can be the case since the southern rail tracks can be upgraded to HSR. Nonetheless, since the HSR will take a while to materialize (on-going feasibility study), we believe the government will build the Gemas-JB EDT first as the latter project has already been finalised and approved. Management also said that Gamuda is going to participate in the HSR project and will be partnering with foreign contractors.

Other updates. The potential sale of its highways (LITRAK) still in talks. Meanwhile, the management is also confident that the last SSG’s takeover offer of all water assets including Gamuda’s 40%-owned SPLASH of RM1.8b (RM0.36/share) will likely to go through. It added that the proceeds of the assets sale could potentially be: 1) distributed amongst shareholders, and 2) utilized for landbanking activities.

Maintain OUTPERFORM on Gamuda with unchanged TP of RM5.20 based on FY14E PER of 16.5x on unchanged earnings. Note that our forecast and valuation are rather conservative as we have yet to impute any contributions of MRT2 or Gemas-JB EDT projects in our orderbook replenishment assumptions in FY14 or FY15.

Source: Kenanga