Gamuda’s outstanding FY17 order book seen to support profit

Gamuda Bhd (Nov 8, RM4.80)

Maintain buy call with an unchanged target price of RM5.80. Gamuda’s share price fell 5% on Tuesday. We believe the drag was due to negative sentiment following the proposal by Mass Rapid Transit Corp Sdn Bhd to call and invite construction and infrastructure firms to submit for a bid to build, on a turnkey basis, and finance the upcoming Mass Rapid Transit Line 3 (MRT3), estimated to cost around RM40 billion.

In view of the requirement to finance the project and the project’s scale, we believe Gamuda is unlikely to take on the main or prominent role that it used to play in Malaysia’s key railway infrastructure projects.

Prima facie, Gamuda appears to be on the losing end from the development, but we are not jumping the gun at this preliminary juncture, with limited details on the new structure pending a tender briefing on Nov 15.

As we have not built in any orderbook replenishment target from MRT3 into our model, the earnings impact of this development is muted.

Nonetheless, we reckon Gamuda still stands a good chance to be involved in MRT3, given its proven track record and unrivalled expertise in major infrastructure construction. However, it might not be able to enjoy the same profit margin it used to have, if it is going in as a sub-contractor vis-à-vis its previous role as project delivery partner and tunnelling contractor for MRT1 and 2.

At this juncture, we do not think Gamuda has lost much of its appeal as the major proxy to Malaysia’s infrastructure development. Mega projects, such as the East Coast Railway Link, Kuala Lumpur-Singapore High Speed Rail and Penang Transport Master Plan could still offer sizeable opportunities for Gamuda to replenish its order book, given its advantage mentioned above.

We make no changes to our earnings forecasts, as we have not imputed any potential win from MRT3 into our earnings model.

We still like Gamuda as the proxy to major infrastructure development in Malaysia, while its property and concession businesses are expected to contribute in sustaining its earnings growth.

The recent selldown might have been overdone, in our opinion, considering the upcoming MRT3’s muted financial impact on our forecasts for Gamuda.

Earnings in the near to medium term should be supported by outstanding construction order book of RM7.8 billion as of financial year 2017, while the property division is expected to be boosted by the strong sales momentum overseas and aggressive launches domestically.

On top of that, a potential special dividend payout could be on the horizon, if the Syarikat Pengeluar Air Sungai Selangor Sdn Bhd divestment can be concluded soon. — RHB Research, Nov 8

This article first appeared in The Edge Financial Daily, on Nov 9, 2017.

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