We  maintain  our  BUY  call  and  forecasts,  but  raise  our  FV  by  3%  to MYR5.61 as we roll forward our valuation base year to CY15. Gamuda’s 9MFY14 results met expectations, and management expects tenders for work  packages  of  Line  2  of  the  Klang  Valley  MRT  project  to  be  called from 2H2015 – with contract awards expected from 1H2016. Gamuda is the best proxy to the buoyant construction sector in Malaysia. 
 
A  solid  9MFY14.  9MFY14  net  profit  of  MYR513.5m  was  in  line,  at 77/73% of our and consensus full-year forecasts respectively.     

Tenders  for  MRT  Line  2  work  packages  from  2H2015?  Gamuda expects tenders for work packages of the MYR25bn Line 2 of the Klang Valley  mass  rapid  transit  (MRT)  project  to  be  called  from  2H2015,  with contract awards expected from 1H2016.     

Progress  on  Line  1.  It  made  good  progress  on  Line  1  of  the  Klang Valley  MRT  project.  As  at  end-3QFY14,  the  financial  completion  of  the elevated portion was at 30% (vis-à-vis 24% three months ago), while that of the tunneling portion was at 45% (vis-à-vis 34% three months ago).   

Another  property  sales  record  in  FY14.  Gamuda  reiterated  its guidance  for  another  record  year  in  FY14  with  MYR1.9bn  in  projected sales,  backed  by  two  new  condominium  projects  in  the  heart  of  Kuala Lumpur, ie The Robertsons and Madge Mansions.

Better valuations for Splash?  Management seemed positive about an amicable  solution  to  the  Syarikat  Pengeluar  Air  Sungai  Selangor  SB (Splash) impasse, thanks to intervention from the federal Government. It guided for “several possible solutions being considered, with possibility of a satisfactory resolution”.

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, in Lines 2 and 3 as well, ii)  it  has  secured  choice  parts  of  Line  1,  as  the  project  delivery  partner (PDP) with a 6% fee and a contractor for the high-margin tunneling jobs, and  iii)  it  is  likely  to  take  the  lead  in  reacting  to  new  sector  price catalysts,  given  its  large  market  capitalisation.  Our  FV  rises  by  3%  to MYR5.61 (from MYR5.45) as we roll forward our valuation base year to CY15 (from CY14).

Tenders For MRT Line 2 In 2H2015?

A solid 9MFY14.  9MFY14 net profit of MYR513.5m came in within expectations at 77/73% of our and consensus full-year forecasts respectively.         Tenders for MRT Line 2 work packages from 2H2015? Gamuda expects tenders for  work  packages  of  the  MYR25bn  Line  2  of  the  Klang  Valley  MRT  project  to  be called  from  2H2015,  with  contract  awards  expected  from  1H2016  (which  is  beyond our forecast period). If this happens, there would be a workable gap between Line 1 and Line 2 to avoid discontinuity, which could result in construction equipment being made idle and staff being redeployed to other projects. To recap, civil works on Line 1 will come to an end by mid-2015.

Management reiterated that Line 2 has been approved by the Cabinet, and a 50:50 MMC-Gamuda  JV  has  been  appointed  the  project  delivery  partner  (PDP)  for  the MYR15bn elevated portion of Line 2 (as in the case of Line 1). This is fairly consistent with a report in The Star in May 2014 that quoted MRT Corp CEO Datuk Wira Azhar Abdul Hamid as saying that “the  Cabinet  already  approved  the  Line  2  proposal  in February  (2014)  and  now  it  is  up  to  the  Government  when  they  want  to  officially announce the rollout”.

Gamuda’s  management  did  say  that  the  delay  in  the  Government’s  formal announcement of its approval for Line 2 “may be partly due to the PDP terms that are still  being negotiated”. While  not  ruling  out  the  possibility  of  a  lower  PDP  fee (compared  with  6%  for  Line  1),  it  is  trying  to  put  forward  a  case  for  a  same  fee structure given the same risks it is undertaking, ie “on time and within budget”. Also, management  reiterated  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  – the MMC-Gamuda JV – being given the right to match the lowest/winning bid.

30% and 45% completion for Line 1.  Gamuda made good progress on Line 1. As at end-3QFY14, financial completion (meaning works certified done and billed) of the elevated portion (on which the JV earns a PDP fee amounting to 6% of the value of the  elevated  portion  contract  estimated  at  MYR14bn)  stood  at  30%  vis-à-vis  24% three  months  ago.  Meanwhile,  the  MYR8.3bn  tunneling  portion  –  on  which  the  JV could  earn  a  construction  margin,  we  assume,  of  12%  -  45%  vis-à-vis  34%  three months ago. At present, four out of total nine tunnel boring machines (TBM) deployed for  Line  1  have  been  “decommissioned” as they have completed their allocated portions of the tunneling jobs.

Another  record  property  sales  in  FY14.  Management  reiterated  its  guidance  for another record year in FY14, with MYR1.9bn projected sales (vis-à-vis MYR1.75bn it achieved  in  FY13),  backed  by  two  new  condominium  projects  in  the  heart  of  Kuala Lumpur, ie The Robertsons and Madge Mansions. For 9MFY14, it already recorded property sales of MYR1.5bn, boosting its unbilled property sales  to MYR1.8bn as at end-3QFY14,  from  MYR1.7bn  three  months  ago.  Our  forecasts  assume  property billings of MYR1.2bn per annum in FY14-15.

Management said  that  its  township  projects  in  Johor  and  the  Klang  Valley  were  not spared  the  headwinds  experienced  by  the  property  sector  on  the  back  of  various cooling  measures  introduced  by  the  Government.  For  9MFY14,  on  a  y-o-y  basis, sales at its township projects in Johor and the Klang Valley were down by 20% and 5-10%  respectively,  while  the  immediate  take-up  rates  for  new  launches  generally were at 70-75% vs 80-85% a year ago.

Better  valuations  for  Splash?  Management  appeared  to  be  positive  about  an amicable solution to the Splash impasse, thanks to an intervention from the Federal Government.  It  guided  for  “several  possible  solutions  being  considered,  with possibility of a satisfactory resolution”. It said that the Government has indicated that it will not invoke Section 114 of the Water Services Industry Act 2006 (WASIA) which allows for it to step in and take over the operations of the water assets. Gamuda rejected an earlier offer from the Selangor state government to take over  its 40%-owned water producer Splash, as the offer valued Splash in its entirety at only MYR250m  vis-à-vis  its  NTA  of  about  MYR2.5bn  and  DCF  valuation  of  MYR3.9bn. Gamuda believed that it would be “in breach of its fiduciary duty” to its shareholders as  it  would  report  a  MYR920m “financial loss” if it took  up  the  offer.  The  huge disparity  between  the  offer price and Splash’s NTA stemmed  largely  from  the  non-recognition  of  Splash’s surplus of assets  over  liabilities  (which  came  largely  from receivables) of more than MYR2bn.   

Forecasts.  Maintained.

Risks  to  our  view.  These  include:  i)  risks  associated  with  Line  1  including  delays, cost  overruns  and  potential  changes  to  the  PDP  terms,  ii)  delays  in  the  rollout  of Lines 2 & 3, 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 dominant role in Line 1, and most likely, in Lines 2 and 3 as well; ii) it has secured the choice parts of Line 1, as a 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,  high  beta  and  share  liquidity.  We  raise  our  SOP-based  FV  by  3%  to MYR5.61  (from  MYR5.45)  (see  Figure  2)  as  we  roll  forward  our  valuation  base  to CY15  (from  CY14).  In  terms  of  the  multiple  for  its  construction  business,  it  is unchanged  at  a  17x  1-year  forward  earnings,  which  is  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

Financial Exhibits

SWOT Analysis

Company Profile

Gamuda is primarily involved in construction, property development, operating toll roads and producing treated water.  It is the leading player in public infrastructure in Malaysia, by virtue of its project delivery partner and tunnelling contractor roles, in the construction of the Klang Valley MRT project.

Recommendation Chart

Source: RHB