Last weekend, PMO announced that the government is in negotiation with GAMUDA for the privatisation of its highway assets. Positive on the news, as it would allow GAMUDA to cash out and focus on its construction and property development divisions. No changes to our FY19- 20E earnings. Downgrade from OP to MP, with an unchanged SoP-driven TP of RM3.05.

News. Last weekend, it was reported in the news that Prime Minister Office (PMO) has begun talks with Gamuda Bhd to negotiate for the acquisition of four highway concessions that the company has a majority stake in, with the aim of abolishing toll collection at these highways. The four highway concessions are Lebuhraya Damansara Puchong (LDP), Sistem Penyuraian Trafik KL Barat (SPRINT), Lebuhraya Shah Alam (KESAS) and SMART Tunnel.

Positive development. We are positive with the news on the privatisation of the four tolled highways mentioned above. There was also great improvement in the communication channel being an official announcement from PMO, which sends a clear and concise message to investors on the above-mentioned privatisations. We laud the government for their efforts in trying to ease the rakyat’s burden, and the potential privatisation move would allow GAMUDA to unlock the value in these four concessions and focus on growing its construction and property development businesses. Based on our Sum-of-Parts valuation, we expect GAMUDA to fetch RM2.8b (we believe that our expectations are conservative, as we did not factor in the potential extension for KESAS, which is slated to end in 2023) in divesting all their equity stakesin these four concessions to the government. That said, we also expect its 1Q19 net gearing of 0.58x to be reduced to 0.22x, but we do not expect any special dividends from this exercise as we believe that management might utilise the proceeds for reinvestment purposes.

Outlook. In anticipation of a slower year ahead, management is now competing in the building space targeting both private and government building works. Recently, they bagged RM900.0m worth of building works to construct high-rise residential and additional works from PNB118. As for its property division, they are maintaining a sales target of RM4.0b backed by local launches, i.e. Gamuda Cove, Gamuda Gardens, Twentyfive.7, albeit registering only c.RM600.0m worth of sales in 1Q19.

Earnings unchanged. Thus far, we are keeping our FY19-20E earnings for now as we did not factor in the loss of income from its highway concession. However, should the privatizations materialise, we would see a reduction of c.48% in our FY19-20E earnings.

Downgrade to MARKET PERFORM. While we are positive with the potential highways privatisation exercise, we are downgrading GAMUDA to MARKET PERFORM (previously, OUTPERFORM) with an unchanged SoP-driven Target Price of RM3.05 as its share price registered year-to-date return of 30%, which could have priced in the potential privatisation exercise. Currently, it is trading at 12.7x FY19E PER, close to KLCON’s 5-year average of 13.4x.

Risks to our call include: (i) cancellation of toll concessions, and (ii) higher-than-expected input costs, and (iii) lower-than-expected property sales.

Source: Kenanga Research - 25 Feb 2019