Gamuda’s order book, unbilled sales seen to sustain earnings in FY19-FY20E

Gamuda Bhd (Oct 1, RM3.28)
Maintain hold with a target price (TP) of RM3.46: Gamuda’s net profit of RM514 million (-15% year-on-year [y-o-y]) for the financial year ended July 31, 2018 (FY18) was below consensus forecast of RM789 million but above our estimate of RM295 million. We believe consensus earnings forecast did not include impairment losses for Syarikat Pengeluar Air Selangor Holdings Bhd (Splash), while the actual losses incurred were below our estimate. We understand Gamuda made partial provisions for the Gamuda Water (GW) receivables write-down and Splash impairment in past years.

The higher progress billings for the Klang Valley’s mass rapid transit line 2 (MRT2) project spurred construction profit before tax (PBT) growth of 26% y-o-y in FY18. Meanwhile, strong property sales of RM3.6 billion (above the target of RM3.5 billion) drove property earnings growth of 17% y-o-y. Concession core PBT declined 4% y-o-y in FY18 and was further dragged down by the Splash impairment. Overall, core earnings grew strongly by 16% y-o-y in FY18.

Gamuda’s outstanding order book of RM12 billion (including the MRT2 project delivery contract) and unbilled sales of RM2.3 billion will sustain earnings in FY19 to FY20 estimate (FY20E). However, the loss of earnings contribution from Splash following the proposed disposal and lower GW earnings will reduce concession earnings by about RM110 million. We expect core earnings per share (EPS) contraction of 14% y-o-y in FY19E (+15% y-o-y in FY18) and +7% y-o-y in FY20E. We introduce FY21E core EPS forecast of 29.4 sen (+12% y-o-y) with earnings growth driven by higher property and concession earnings.

We maintain our “hold” call on a 12-month view as we believe the current core FY19E price earnings of 13 times and price-to-book of 1 times are fair, close to one standard-deviation below mean levels. We lift our TP to RM3.46 from RM3.42 to reflect a higher construction division valuation in our revised net assets value. — Affin Hwang Capital, Oct 1

This article first appeared in The Edge Financial Daily, on Oct 2, 2018.

Click here for more property stories.