Gamuda shares down 3.9% after analyst downgrade

KUALA LUMPUR (Dec 13): Shares in Gamuda Bhd were down as much as 3.9% in early trade today as Macquarie Equities Research downgraded the construction player to "Underperform" rating, from "Outperform" and cut its target price to RM4, from RM5.90 previously.

The stock touched an intraday low of RM4.71 but rebounded to RM4.73 at 3.15pm, with 5.05 million shares done. Its market capitalisation stood at RM11.71 billion.

In its report, Macquarie’s analyst Aiman Mohamad said the research house has turned less positive on all Gamuda’s major business divisions — construction, property and toll concessions — as each division faces significant valuation-eroding challenges, going ahead.

For Gamuda’s construction division, the group has revised lower its bullish orderbook replenishment target from RM20 billion previously for the financial year ending July 31, 2018 (FY18) and FY19, to about RM12 billion to RM16 billion, which is still considered as overly-optimistic, according to Aiman.

“Year-to-date, Gamuda has yet to win any construction contract and has missed out completely on major infrastructure projects like LRT3 and southern EDTP. We believe that the government, for future infrastructure projects, will likely favour foreign players as the turnkey contractors, given their superior financing and technical capabilities. As such, Gamuda’s participation is likely to be limited to the subcontractor level,” Aiman said.

Coupled with a more competitive operating landscape, Macquarie expects future order wins to be smaller in value and at lower margins.

“We revised our orderbook replenishment target to RM5 billion, from RM10 billion for FY18-FY20, which coupled with reduced margin expectations, has us now valuing the construction division on a peer comparable multiple of 14 times,” Aiman added in his report.

As for the property division, Aiman highlighted the management’s property sales target of RM3.5 billion for FY18 could be too bullish in a bearish market, despite Gamuda achieving property sales of RM900 million during the first quarter for its FY18.

He noted the broader property sector continues to de-rate due to challenging headwinds such as oversupply, demand-supply mismatch, and now also faces the prospect of rising interest rates into second half of 2018.

“We believe the ambitious sales target of RM3.5 billion will be a tall order for Gamuda Land to achieve, given the challenging market conditions…our FY18 sales estimate is RM2.6 billion, 26% short of Gamuda Land’s target,” Aiman added.

Following the RM98.5 million impairment on its SMART tunnel concession this year under the concession division, as a result of lower-than-expected toll revenue, Gamuda could see further earnings downgrade of Gamuda’s toll road concessions.

“We believe Gamuda’s other intracity toll roads are also vulnerable to valuation erosion due to lower traffic volumes, as all the MRT and LRT lines are progressively operational between 2020 and 2025. This would further be exacerbated by scheduled toll hikes which historically have shown tangible negative impact on traffic volumes,” Aiman said.

He also noted that the government is also contemplating the imposition of a congestion charge once all the rails lines are fully operational, to promote public transportation ridership, which could hurt its toll roads.

“The heightened risk profile for this division’s earnings led us to cut the valuations by 22%,” Aiman said.

Bloomberg consensus showed Macquarie is the only research house that has a "Sell" call on Gamuda. It is interesting to note that despite the downgrade, Macquarie remains positive on the Malaysian construction sector, which it said should continue to respond favourably to newsflow and contract awards stemming from the ECRL, MRT3 and HSR projects over the new 12 to 18 months.

At current levels, Gamuda is trading at a trailing P/E of 19.2 times. — theedgemarkets.com

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