Review

• GAMUDA’s FY19 net profit of RM706.1mn came in within expectations, accounting for 102.3% and 104.5% of ours and consensus’ full-year estimates.

• FY19 core profit of RM706.1mn was 15.7% lower YoY, as the group stopped recognising its share of Splash’s profits with effect from 1QFY19, following the sale of Splash at the end of FY18. Lower earnings contribution was also seen in the construction division following cost rationalisation in MRT2 project by the government. This was partially offset by higher property earnings, boosted by encouraging property sales in Vietnam.

• QoQ, 4QFY19 net profit was marginally higher by 5.1% at RM184.9mn. Stronger earnings from the property division (PBT +68.7%) was largely offset by lower contributions from the construction (PBT -47.0%) and concession divisions (PBT -47%).

Briefing highlights

Construction

• The management expects the signing of the PDP agreement for Penang Transport Master Plan to take place in 4QCY19 with land reclamation works for Island A of Penang South Reclamation Scheme to kick-off in 2HCY20. This will be followed by the commencement of construction works for LRT and Pan Island Link 1 shortly after. The management reveals that there are positive indications from the federal government that the key funding issues could soon be resolved.

• As part of GAMUDA’s strategic decision to expand its construction division in Australia, which has an addressable market of A$20bn for railbased projects, it had recently entered into heads of agreement to acquire a 50% equity stake in Martinus Rail, which is a privately owned, tier 2 specialist rail constructor in Australia with projects in Australia and New Zealand. This provides a springboard into the Australian market and to tap on the opportunities from massive infra spending planned over the next decade. We gather that the purchase consideration for the proposed acquisition of a 50% stake in Martinus is likely to be below RM100mn.

• GAMUDA’s outstanding order book currently stands at around RM9.2bn.

Property Development

• The group achieved RM3.1bn in property sales in FY19, falling short of management’s revised target of between RM3.5bn and RM3.8bn. This was mainly due to lower-than-expected property sales in the domestic market. This represents a 14% drop in sales compared with that of FY18. About 60% of the full-year sales were generated in Vietnam.

• With depleting land banks in Vietnam, Celadon City especially, GAMUDA is identifying new projects in Vietnam to sustain sales in the medium term.

• For FY20, GAMUDA is eyeing property sales of RM4.0bn.

Concessions

• The offers by MoF to acquire 4 highways, namely LDP, KESAS, SPRINT and SMART had been accepted by the boards of the concessionaires. The Cabinet is expected to make a decision on the toll roads acquisition soon. Recall, the deadline for signing of the definitive agreement has been extended by 2 months to end October 2019.

Impact

• Following the 4QFY19 results, we trim FY20 and FY21 earnings forecasts by 2.4% and 2.6% respectively, after fine-tuning property and concession earnings, and updating FY19 full-year numbers. We introduce FY22 earnings forecast with a projected net profit of RM520.5mn. This represents a 22.5% decline in earnings compared with FY21 net earnings as we have not factored in any new construction job win in our earnings model.

• We have yet to exclude contribution from the 4 highways, pending further development on the acquisition by the government. The 4 highways contribute approximately 1/3 of the group’s current earnings.

Outlook

• The outstanding construction order book currently stands at around RM9.2bn. This could provide earnings visibility to the group for the next 2 years.

• If the disposal of the 4 highways goes through, there will be earnings vacuum in concession earnings as the segment would then largely comprise Gamuda Water. Earnings are likely to decline in FY20.

Valuation

Following the earnings adjustments, we lower the target price from RM3.65 to RM3.55, based on unchanged CY20 earnings with unchanged target PE multiples of 16x, 10x and 12x for construction, property and concessions. Maintain SELL.

Source: TA Research - 30 Sept 2019