We  maintain  our  BUY  call,  forecasts  and  MYR5.45  FV.  This  follows 1HFY14  results that  met  expectations, as well as  the fact  that Gamuda is  now  working  on  the  basis  that  the  Cabinet  has  approved  the MYR25bn  Klang  Valley  MRT  Line  2.  Gamuda  is  the  best  proxy  to  the construction sector, which  is riding on what we believe is an extended upcycle backed by the MYR73bn Klang Valley MRT project.

• A  solid  1HFY14.  The  1HFY14  net  profit  was  within  expectations,  at 50%/48% of our full-year forecast and market consensus respectively.   
• MRT Line 2 as good as approved. Gamuda and project owner MRT Co are now working on a basis that the MYR25bn Line 2 of the Klang Valley MRT  project  has  been  approved  by  the  Cabinet,  pending  formal announcement by the Government.   
• Line  1  elevated/tunneling  portions  24%  and  34%  completed. Gamuda  is  making  good  progress  on  Line  1  of  the  Klang  Valley  MRT project. As at end-2QFY14, financial  completion of the elevated portion stood  at  24%  (vis-à-vis  17%  three  months  ago),  with  the  tunneling portion 34% complete (vs 24% three months ago).  
• Stable  property  sales  in  1HFY14.  Despite  the  headwinds  in  the property sector, Gamuda  still expects  another record  year in FY14,  with MYR1.9bn in projected sales versus the MYR1.75bn it achieved in FY13. In 1HFY14, it already recorded property sales of MYR980m.
• ‘’See  you  in  court  if  Wasia  invoked’’.  Gamuda  will  take  the Government to the court if the  latter  invokes Section 114 of the Water
• Services  Industry  Act  2006  (Wasia)  to  take  over  its  40%-owned  water producer,  Splash, given the low  MYR250m offer for Splash in its entirety against its NTA of about MYR2.5bn and DCF valuation of MYR3.9bn.
• Maintain  BUY.  We  like  Gamuda  as:  i)  it  is  the  best  proxy  to  public infrastructure spending in Malaysia given its dominant role in   Line 1 of the Klang Valley  MRT project, and most likely,  Lines 2 &  3  as well,  ii) it has secured the best parts of  Line 1  as the  PDP  with a 6% fee and a contractor for the high-margin tunneling jobs; and iii) it is likely to take the lead  in  terms  of  reacting  to  new  sector  price  catalysts,  given  its  large market capitalisation. Our FV is unchanged at MYR5.45.  

MRT Line 2 As Good As Approved
A  solid  1HFY14.  Gamuda’s  1HFY14  net  profit  was  within  expectations  -  at 50%/48% of our full-year forecast and market consensus respectively. MRT Line 2 as good as in the bag.  Gamuda and project owner MRT Co are now working on a  basis that the MYR25bn Line 2 of the Klang Valley MRT project has been approved by the Cabinet, and the 50:50 MMC-Gamuda JV has been appointed as the project delivery partner (PDP) for the elevated portion of Line 2 (as in the case of Line  1).  Gamuda expects the Government to soon formally announce its approval for  Line  2  as  well  as  the  appointment  of  MMC-Gamuda  JV  as  the  PDP  for  the elevated portion.

Gamuda is now working towards the goal that civil works on Line 2 will start in 1Q16, It believes that this can potentially be brought forward to 4Q15 if it is able to “shorten the  lead  time”,  ie  time  needed  to  effect  land  acquisition,  public  feedback,  detailed design  and  tendering of  work  packages,  etc,  to  less  than  two  years  (Line  1’s lead time was about two years). This will ensure an acceptable and workable gap between Lines  1 and Line 2  to avoid discontinuity that  may  result in construction equipment being left  idle and staff redeployed to other p rojects. To recap,  civil works on Line 1 will be very much at the tail-end by mid-2015.

Gamuda reiterated that the indication from MRT Co is such that the PDP fee for the MYR15bn elevated portion of Line 2 will be lower than the 6% from Line 1. However, the group  believes it will be “not less than 4%, hopefully 5%”. It believes other key PDP terms “will not deviate substantially from Line 1”. Also, Gamuda said that as in the  case  of  Line  1,  the  MYR10bn  underground  portion  of  Line  2  is  likely  to  be awarded on a Swiss challenge basis, ie via an international tender, with the sole local bidder – MMC-Gamuda JV – being given the right to match the lowest/winning bid.24% and 34% completion for Line  1.  Gamuda made good progress on  Line 1 of the  Klang  Valley  MRT  project.  As  at  end-2QFY14,  financial  completion  (ie  works certified  done  and  billed)  of  the  elevated  portion (on  which  MMC-Gamuda  earns a PDP fee amounting to 6% of the value of the elevated portion contract  estimated at MYR14bn)  stood  at  24%  (vis-à-vis  17%  three  months  ago),  with  the  MYR8.3bn tunneling  portion  (on  which  MMC-Gamuda  JV  earns  a  construction  margin,  we assume at 12%) at 34% complete  (from  24% three months ago).  At present, all  10 tunnel boring machines (TBM) worth about MYR1bn have been delivered to the sites, with seven operational while the remaining three are being assembled.

Stable  property sales in 1HFY14.  Despite the headwinds in the property sector on the  back  of  various  cooling  measures  introduced  by  the  Government  recently , Gamuda  remains  bullish  on  its  property  business.  It  reiterated  its  guidance  for another  record  year  in  FY14,  with  MYR1.9bn  in  projected  sales,  vis-à-vis  the MYR1.75bn  it achieved in FY13.  For 1HFY14, it already recorded property sales of MYR980m,  sustaining  its  unbilled  property  sales  at  MYR1.7bn  as  at  end-2QFY14.

While  Gamuda  expects  lower  sales  in  FY14  from  Horizon  Hills  in  Johor  (already, sales halved to only MYR150m in 2QFY14 from MYR300m in 1QFY14), this will be offset by sales from two new condominium projects in the heart of Kuala Lumpur, ie The  Robertsons  and  Madge  Mansions.  No  change  to  our  earnings  forecasts  that assume  property  turnover  and  EBIT  of  MYR1.2bn  and  MYR290m  per  annum  in FY14-15.

To take Government to court if it invokes Wasia. Gamuda is fully prepared to take the  Government  to  court  in  the  event  the  latter  invokes  Section  114  of  the  Water Services Industry Act 2006  (Wasia),  which allows for it to step in and take over the operations of its 40%-owned water producer Splash. Gamuda reiterated that it cannot even consider the current offer, which  values Splash in its entirety at MYR250m visà-vis its NTA of about MYR2.5bn and DCF valuation of MYR3.9bn. Gamuda believes that it will be “in breach of its fiduciary duty” to its shareholders as  the company were to  report  a MYR920m “financial loss” by taking up the Government’s latest offer. The huge disparity between the Government’s offer price and Splash’s NTA stems largely from  the  Government’s non-recognition of  Splash’s surplus of assets  over liabilities (which comes largely from receivables) of more than MYR2bn.  

Forecasts.  Maintained  as:  i)  Line  2  will  only  start  to  contribute  more  significantly from  FY17,  which  is  beyond  our  forecast  period,  and  ii)  It  is  unclear  if  the Government will invoke Section 114 of WASIA.Risks to our view.  These include: i) risks associated with Line  1 of the Klang Valley MRT project including delays, cost overruns and potential changes to the 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.

Maintain BUY. The prospects for the construction sector remain strong as it rides on what  we  believe  is  an  extended  upcycle, propelled  largely by  the  MYR73bn  Klang Valley  MRT  project. With  Line  1  worth  MYR23bn  currently  under  construction  and Lines 2 & 3 worth MYR25bn each under planning, this mammoth mega project will keep  players busy  until  2021.  We like  Gamuda  as:  i)  it  is the  best  proxy  to  public infrastructure  spending  in  Malaysia  given  its  d ominant  role  in  Line  1  of  the  Klang Valley MRT project, and most likely, in Lines 2 & 3 as well; ii) it has secured the best parts  of  Line  1,  as  a  PDP  with  a  6%  fee  and  a  contractor  for  the  high -margin tunnelling jobs; and iii) it is likely to take the lead in terms of reacting to new  sector price catalysts, given its large market capitalisation, high beta and share liquidity. Our FV is unchanged at MYR5.45,  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, operation of toll roads and the production of treated water. It is the leading  player  in  public  infrastructure  in  Malaysia  by  virtue  of  its  project  delivery  partner  and  tunnell ing  contractor  roles  in  the construction of the Klang Valley MRT project.

Recommendation Chart

Source: RHB