Gamuda  has  finally  obtained  the  green  light  from  the  Government  to embark  on  the  MYR25bn  Line  2  of  the  Klang  Valley  MRT  project.  With this, we believe it is on track to start work by mid-2016. Gamuda is the best  proxy  to  the  buoyant  construction  sector,  given  its  dominant  role in Malaysia’s largest public infrastructure project. We maintain our BUY call, forecasts and SOP-based TP of MYR5.61, implying a 12.4% upside.

MTR Line 2 now a reality. The Government has formally appointed the 50:50  MMC-Gamuda  JV  as  the  project  delivery  partner  (PDP)  for  the MYR150bn  elevated  portion  of  the  Sungai  Buloh-Serdang-Putrajaya Line,  which  is  also  known  as  Line  2  of  the  Klang  Valley  MRT  project. While  the terms and conditions are still “to be negotiated and agreed”, we believe the key ones are unlikely to significantly deviate from those of Line 1, namely, “on-time delivery and within budget”,  in  exchange  for  a 6%  PDP  fee.  For  the  MYR10bn  underground  portion  of  Line  2,  as  per Line 1, we believe it 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. 

Work to start by mid-2016. With this, we believe Gamuda is on track to issue  tenders  for  work  packages  of  the  elevated  portion  by  end-2015, with  contract  awards  expected  by  mid-2016.  This  would  ensure continuity with civil works on Line 1 slated for completion by mid-2015.

Forecasts.  We  maintain  our  forecasts  as  earnings  from  Line  2  are beyond our forecast period.

Risks  to  our  view.  These  include:  i)  delays  and  cost  overruns  in construction jobs, and ii) weak property sales.

Maintain  BUY.  We  like  Gamuda  as:  i)  it  is  the  best  proxy  to  public infrastructure  spending  in  Malaysia  given  its  dominant  role  in  the MYR73bn  3-line  Klang  Valley  MRT  project,  ii)  it  has  reaped  the  best profits from the Klang Valley MRT project thanks to the 6% PDP fee and double-digit tunnelling margins, and iii) it is poised to make an inroad to the  booming  infrastructure  and  property  sectors  in  Penang  via  a  much-anticipated  winning  bid  for  the  PDP  role  of  the  MYR27bn  Penang Transport  Master  Plan.  We  keep  our  SOP-based  TP  at  MYR5.61  (see 
Figure 2).

Recommendation Chart

Source: RHB