We maintain our BUY call, forecasts and MYR5.45 FV following Gamuda’s MYR875m cash offers to buy out partners which collectively hold a 70% stake in toll road concessionaire Kesas. We are neutral on the deal as its impact on Gamuda’s fundamentals is mixed. We maintain our view that Gamuda is the best proxy to public infrastructure spending in Malaysia, particularly the Klang Valley MRT project.
Proposes MYR875m Buyout For Kesas
Making a bid to take full control of Kesas. Gamuda has made MYR875m cash offers to buy out partners which collectively hold a 70% in toll road concessionaire Kesas comprising: i) Perbadanan Kemajuan Negeri Selangor (MYR375m for its 30% stake); ii) Amcorp Properties Bhd (MYR250m for its 20% stake); and iii) Permodalan Nasional Bhd (MYR250m for its 20% stake). Kesas holds a 30-year toll concession ending Aug 2023 for the 35-km Shah Alam Expressway linking the Kuala LumpurSeremban Highway in the east and Pandamaran in the west.
We are neutral. We are neutral on the deal after considering: i) valuations of the deal which we believe are fair; ii) the positive aspects of the deal including its earnings accretive nature and that it will not alter Gamuda’s plan for a special dividend payout on the disposal of Gamuda’s stake in Splash; and iii) the negative aspects of the deal including the impact on Gamuda’s balance sheet and the opportunity cost it carries.
Valuations. At the offer prices, the deal effectively values Kesas in its entirety at MYR1.25bn. Based on Kesas’ latest net profit of about MYR120m per annum, this translates to a P/E of about 10x. Also, our DCF model shows that at an NPV of MYR1.25bn, the deal effectively discounts back Kesas’ cashflow over the remaining 10-year tenure of the concession at a discount rate of about 10%, which we deem fair. In our DCF model, we assume an annual traffic volume growth rate of 5.5% (Kesas reported a 5.5% growth in average daily traffic to 290,653 vehicles in its latest financial year).
Positive aspects. Ceteris paribus, based on our estimates, the deal could boost Gamuda’s FY15 earnings by MYR51m or 8% (additional MYR84m net profit from the 70% stake, minus funding cost of MYR33m based on an interest rate of 5% and a tax rate of 25%). We understand that to a certain extent, this deal is “inspired” by the need to replace the earnings vacuum left by the potential disposal of Gamuda’ s 40% stake in water production concession Splash pursuant to the on -going Klang Valley water restructuring exercise spearheaded by the Selangor state government. Also, during our conversation with Gamuda, the company stressed that the deal will not alter its plan for a special dividend payout on the disposal of its 40% stake in Splash. To recap, Gamuda is hopeful that the disposal could be concluded by 1Q2014. It guided a net price tag of MYR2-2.2bn for Splash in its entirety that means Gamuda’s 40% stake could fetch as much as MYR800-880m. Assuming Gamuda is to return the entire amount to its shareholders, this will work out to b e 37-41 sen per share. Negative aspects. On the other hand, based on our estimates, the deal could increase Gamuda’s net debt and gearing to MYR2.4bn and 0.49x from MYR714m and 0.15x as at Jul 2013, after factoring in the MYR875m consideration, coupled with the consolidation of MYR800m Islamic debt at Kesas. The acquisition comes with a hefty opportunity cost to Gamuda in the sense that Gamuda’s war chest is effectively depleted and Kesas is not quite an asset or business with high growth prospects.
Forecasts. Maintained, pending the completion of the deal.
Risks to our view. These include: i) risks associated with the Sg Buloh – Kajang (SBK) MRT Line project including delays, cost overruns and potential changes to the project delivery partner (PDP) terms; ii) delays in the rollout of Lines 2 & 3 of the Klang Valley MRT project; and iii) a prolonged slowdown in the property market in Vietnam.
Maintain BUY. We believe the local construction sector will continue to do well as long as the MYR73bn Klang Valley MRT project is intact. Given the scale and scope of the project, it entails the involvement of virtually all players along the value chain of the sector, from project delivery partners and general/specialist contractors, to suppliers of precast segments and basic building materials. This will keep the sector busy until 2019. While the Government may defer certain mega projects in its bid to narrow its fiscal deficit and prevent further weakening in its current account, we are not perturbed as none of these are as critical as a source of jobs for the sector compared to the Klang Valley MRT project.
We like Gamuda as: i) it is the best proxy to public infrastructure spending in Malaysia given its dominant role in the SBK MRT Line project, and most likely, in Lines 2 & 3 of the Klang Valley MRT project as well; ii) it has secured the best parts of the SBK MRT Line project, as a PDP with a 6% fee and a contractor for the highmargin tunneling jobs; and iii) it is likely to take the lead in terms of reacting to new price catalysts (for instance, Cabinet approval for Line 2 of the Klang Valley project), given its large market capitalisation, high beta and share liquidity. Our MYR5.45 FV is based on SOP (see Figure 2), valuing its construction business at 17x 1-year forward earnings, at a premium to our 1-year forward target P/Es for the construction sector of 10-16x to reflect the group’s large market capitalisation and high share liquidity.
Financial Exhibits
SWOT Analysis
Company Profile
Gamuda is primarily involved in construction, property development, the operation of toll roads and production of treated water. It is the leading player in public infrastructure in Malaysia by virtue of its project delivery partner and tunneling contractor roles in the construction of the Klang Valley MRT project.
Recommendation Chart
Source: RHB
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GAMUDACreated by kiasutrader | Jun 14, 2016
Created by kiasutrader | May 05, 2016
lotsofmoney
When Pakatan in power, all the toll will be abolished. Gamuda will be OK but all the shareholders will die.
2013-11-06 15:34