Gamuda’s FY15 results met expectations. We maintain our BUY call, earnings forecasts and TP of MYR5.26 (17% upside). Gamuda is the best proxy to the buoyant construction sector given its dominant role in the MYR80bn Klang Valley Mass Rapid Transit (MRT) project. Meanwhile, the Penang Transport Master Plan (PTMP) project enables it to leapfrog into the construction and property markets in Penang.

Within forecasts. Gamuda’s FY15 (Jul) net profit met our forecast and consensus estimates.

First MRT2 tender next month. Gamuda expects to call tenders for the first main civil package for MRT2 next month and should award the contract by Apr/May 2016. It will call tenders for the remaining nine m ain civil packages and award them to successful bidders throughout 2016. Meanwhile, MRT Co will call tenders for the underground/tunneling package worth about MYR12bn in Nov 2015, with the contract award scheduled in Jun 2016. As per MRT1, the tunneling package of MRT2 will be awarded on a Swiss challenge basis.

FY16 property sales target at MYR1.3bn. Gamuda recorded MYR1.21bn property sales in FY15, down by 33% vis-à-vis MYR1.81bn achieved in FY14. It guided for MYR1.33bn property sales in FY16, with key growth drivers being its relatively smaller standalone new property projects in Singapore and Australia. These overseas projects typically have a shorter turnaround time.

Earnings boost from PTMP not immediate. Gamuda is cautious on the timing of commencement of works for the PTMP project.

Forecasts. We maintain our earnings forecasts.

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

Maintain BUY. Gamuda is the best proxy to the buoyant construction sector given its dominant role in the MYR80bn Klang Valley MRT project. Meanwhile, the latest PTMP project enables it to leapfrog into the construction and property markets in Penang. We keep our SOP-based TP at MYR5.26. Gamuda’s P/E could ease to 15.2x in FY17F from 17.8x in FY16F on the back of a 16.6% recovery in earnings in FY17F.

MRT2 To Start Work By Mid-2016 Within forecasts. Gamuda’s FY15 net profit met our forecast and consensus estimates. First MRT2 tender next month. Gamuda expects to call tenders for the first main civil package for MRT2 next month and should award the contract by Apr/May 2016. It will call tenders for the remaining nine main civil packages and award them to successful bidders throughout 2016. This is in accordance with Gamuda’s capacity as the project delivery partner (PDP), via MMC-Gamuda joint venture (JV), for the elevated portion of MRT2 worth about MYR16bn. Meanwhile, MRT Co will call tenders for the underground/tunneling package worth about MYR12bn in Nov 2015,with the contract award scheduled in Jun 2016. As per MRT1, the tunneling packageof MRT2 will be awarded on a Swiss challenge basis, ie via an international tender with local bidders including MMC-Gamuda JV being given “a first right of refusal at the lowest bid plus a 2.5% to 7.5% margin”.

Slight variation in PDP terms. While MMC-Gamuda will receive a 6% PDP fee for the MYR16bn elevaed portion of MRT2 (as per MRT1), there is a slight variation. MMC-Gamuda will be paid 5.5% of contract value for “on time delivery and meeting budget” and 0.5% of contract value for meeting three new KPIs relating to safety, quality and “public response” (as compared with the entire 6% being dependent on “on time delivery and within budget” under MRT1).

62% and 75% completion for MRT1. Meanwhile, Gamuda made good progress on MRT1. As at end-4QFY15, financial completion rates (ie works certified done andbilled) of the elevated and tunneling portions stood at 62% and 75% respectively, compared with 55% and 68% respectively three months ago. MMC-Gamuda JV earns a PDP fee amounting to 6% of the contract value of the elevated portion of MYR14bn and a construction margin, we assume at 12%, from the MYR8.3bn tunneling package.

FY16 property sales target at MYR1.3bn. Gamuda recorded MYR1.21bn property sales in FY15 (56% and 44% from Malaysia and Vietnam respectively), down by 33% vis-à-vis MYR1.81bn achieved in FY14. It guided for MYR1.33bn property sales in FY16 (53%, 39%, 7% and 2% from Malaysia, Vietnam, Australia and Singapore respectively). Gamuda does not expect a strong pickup in local property sales in FY16 amidst headwinds in the property sector, on the back of various cooling measures introduced by the Government. While it did relatively well in Vietnam in FY15, it is “not convinced that there is a full-fledged recovery” in the property sector in Vietnam as yet. The key growth driver s in property sales in FY16 will come from its relatively smaller standalone new property projects in Singapore and Australia. These overseas projects typically have a shorter turnaround time , given the promptness of the local authorities in granting various approvals. Gamuda also believes the property markets in these two developed economies are likely to emerge from a downcycle ahead of Malaysia, as they slipped into a slowdown much earlier than Malaysia in recent years. Gamuda is developing 590 units of Housing and Development Board (HDB) flats on a 3-acre site in Toa Payoh, Singapore, with a GDV of MYR2bn. In Australia, it is selling 150 units of apartments on a 0.35-acre land plot at Chapel Street in South Yarra, about 4km from Melbourne central business district (CBD) with a GDV of MYR400m. As at end-4QFY15, its unbilled sales stood at MYR1.3bn, unchanged from three months ago.

Earnings boost from PTMP not immediate. Gamuda is cautious on the timing of commencement of works for the PTMP project. It hopes to make submissions to the Department of Environment (for matters regarding land reclamation) and Land Transport Commission (SPAD) (for matters regarding public transportationdevelopments) by the end of the year. It expects the two f ederal authorities to take up at least a year to evaluate the submissions and grant their respective approvals under the best-case scenario. Gamuda is not prepared to “spend serious money” until and unless it secures these f ederal approvals. Given the uncertain timing, we have yet to factor into our earnings forecasts any contribution from the PTMP project. We hold the view that the key PDP terms of the PTMP project will mirror those of the Klang Valley MRT project, ie “on-time delivery and within budget” in exchange for a PDP fee - probably at 6% of the project value as in the case of the Klang Valley MRT project.

To recap, the PTMP is a blueprint spanning 2014 to 2030 by the Penang state government to improve the highway network and develop an integrated public transport system that combines buses, trams, light rail transit (LRT) and water taxis on Penang Island and Seberang Prai. Gamuda, via 60%-owned SRS Consortium, was appointed the PDP for the project by the Penang state government in Aug 2015.

Gamuda’s partners in the consortium are private companies Ideal Property Development SB (an established but low-key privately-owned Penang-based property developer) (20%) and Loh Phoy Yen Holdings SB (a company we believe related to the family of the late Penangite tycoon Tan Sri Dato’ Loh Boon Siew)(20%).

A new “investment phase”. With the PTMP project, Gamuda is embarking on a new corporate “investment phase” as the core funding option of the plan is payment in kind in the form of “rights to reclaim land”. On 24 Feb, The Edge Financial Daily,quoting a “government source”, reported that a 50.6ha bed in Middlebank, located between Penang Island and the Sungai Pinang river mouth (see shaded area in Figure 1), has been earmarked for this purpose.

We believe there is now more than an even chance that Gamuda will be able to raise the amount from the disposal of its 40% stake in water producer Syarikat Pengeluaran Air Sungai Selangor SB (Splash). This is following the signing on 10 Jul 2015 of a supplemental agreement to the master agreement between the Federal and Selangor state governments pursuant to the restructuring consolidation of the water sector in Selangor. The parties hope to resolve the longstanding impasse soon, we believe, including coming out with a revised offer for Splash that is acceptable to its shareholders.

Recall that Gamuda rejected an earlier takeover offer from the Selangor state government (led by the previous Menteri Besar) that valued Splash in its entirety at only MYR250m vis-à-vis its book value of about MYR2.8bn and DCF valuation of MYR3.9bn. In our previous discussion with Gamuda, it said that it will seriously consider a revised offer from the Selangor state government, if the latter values Splash at “close to its book value”. For illustration purposes, Gamuda’s 40% stake in Splash would fetch MYR896m, MYR1bn and MYR1.12bn based on 0.8x, 0.9x and 1x its book value respectively (in our SOP-based TP for Gamuda, we assume 0.8x).Forecasts. We maintain our earnings forecasts.

Risks to our view: i) delays and cost overruns in construction jobs, and ii) weak property sales.Maintain BUY. Gamuda is the best proxy to the buoyant construction sector given its dominance in the MYR80bn Klang Valley MRT project, being the PDP for the elevated portion and the tunnelling contractor via the MMC-Gamuda JV. Meanwhile, the PTMP project enables it to leapfrog into the construction and property markets in Penang. We are also positive on Gamuda as:i) news flow on MRT2 should pick up ahead of the commencement of its physical works by 1H16,

ii) the risk of a cash call to fund the MYR27bn PTPM project is now reduced, as there is a better chance that Gamuda would be able to raise the funding needs from the disposal of its 40% stake in Splash, andiii) the market should gradually shift its focus to Gamuda’s earnings recovery in FY17 driven by contributions from MRT2, from an earnings contraction in FY16 due to the lack of contributions from both MRT1 (at the tail end) and MRT2 (at the initial stages).

We keep our SOP-based TP at MYR5.26 that values Gamuda’s construction business at 18x 1-year forward earnings – in line with our benchmark 1-year forward target P/Es of 16-18x for large -cap construction stocks (see Figure 3). Also, we believe the premium valuations of 18x 1-year forward earnings of Gamuda’s earnings visibility backed by the Klang Valley MRT project. Our valuations for Gamuda have yet to reflect any specific enhancement from the PTMP project. Based on our forecasts and the current share price, Gamuda’s P/E could ease to 15.2x in FY17F from 17.8x in FY16F, on the back of a 16.6% earnings recovery in FY17F. While we believe the concern that the Government may defer the Klang Valley MRT project on a continued slump in oil and gas prices is valid, we take comfort that: i) practically, the project does not impact the nation’s budget deficit as it is financed with funding raised from a special purpose vehicle (SPV) (although we are mindful that international rating agencies do take into consideration off-balance sheet liabilities of the Government when they assess the sovereign rating of a nation), ii) asMRT2 is only scheduled to commence construction by 1H16, its progress payments to contractors will only accelerate from 2017 (by then, hopefully, oil and gas prices would have recovered substantially), and iii) the Government now has a new source of tax revenue with the implementation of the goods and services tax (GST) from 1 Apr 2015, as well as savings from the abolition of petrol and diesel subsidies.Gamuda is relatively less vulnerable to selling pressure from foreign shareholders. As at end-Aug 2015, its foreign shareholding already dropped to a post-Asian Financial Crisis low of 22%, from 32% at the start of the year, which is not too far off from the record low of about 20% registered during the Asian Financial Crisis in 1997/1998.