SPLASH deal may lead to more water projects for Gamuda

Gamuda Bhd (Aug 10, RM3.69) 

Maintain outperform with a lower target price of RM4.30, from RM4.35: Last Thursday, Gamuda Bhd announced that its 40%-owned associate Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) resolved to accept the takeover offer from Air Selangor for RM2.55 billion.

To recap, the proposed acquisition of SPLASH by Air Selangor includes 100% of SPLASH ordinary shares and 100% of SPLASH’s redeemable unsecured loan stocks, with RM1.9 billion to be paid as upfront payment while the remaining RM650 million will be settled with nine-year installment as part of their sale and purchase agreement (SPA) terms. Both Air Selangor and SPLASH are expected to finalise the terms and conditions of the SPA by Sept 14, 2018.

As highlighted in our previous report dated Aug 6, 2018, the offer price of RM2.55 billion from Air Selangor represents a 26% discount to its net book value of RM3.5 billion as of December 2017, which we believe is a sweet deal for the Selangor state government. That said, the current offer is still higher than the net offer made back in 2014 of RM250.6 million.

While the offer price of RM2.55 billion came lower than expected we believe this bodes well for Gamuda as the water saga in Selangor finally comes to an end, and they can now fully focus on their ongoing construction and development projects. That said, we also believe that Gamuda could potentially benefit from the resolution as we expect more water-related projects to be dished out in the future, within the next one to two years, as both federal and state governments could potentially allocate more budget in improving the infrastructure in the water sector, that is more water treatment plant, pipe replacement etc. 

We do not expect any special dividend arising from the proceeds from the disposal, as we believe that Gamuda may use it to pare down debts, which would bring down its net gearing from 0.55x to 0.42x. Its outstanding order book comfortably stands at RM6.4 billion with earnings visibility for the next three years. As for its property division, Gamuda raked in RM1.9 billion worth of sales in 1H18, bringing its unbilled sales to RM2.4 billion with three-year earnings visibility.

For FY19, we reduce our net profit forecast by 38% and core net profit by 5%, after factoring in the one-off loss of RM300 milliom and the loss of recurring income arising from the sale of SPLASH.

We believe that after the resolution of the water saga in Selangor, Gamuda would be able to move on and focus on future projects like the Penang Transport Master Plan, and the third mass rapid transit project.

Downside risks to our call include: i) unexpected delay of the second mass rapid transit project; ii) another deadlock in SPLASH takeover deal; iii) higher-than- expected input costs; and iv) lower-than-expected property sales. — Kenanga Research, Aug 10