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Investment Highlights
• We are maintaining our BUY recommendation on Gamuda Bhd, with the fair value raised to RM4.25/share (previously: RM4.20/share) – based on a 5% discount to its sum-ofparts value.
• This is to account for maiden contributions from the Sg. Buloh-Kajang MRT line as well as the Madge Mansion development, but partly mitigated by the likelihood of further delays to the double-tracking project.
• The increasing newsflow on the Klang Valley MRT project would likely re-galvanise investor interest in Gamuda, in our view. The 51km-Sg. Buloh-Kajang route – the first major line for the new MRT system – appears set to take off. To be sure, pre-qualification tenders may be out next month ahead of the targeted commencement of construction works by July 2011.
• With its role as Project Delivery Partner (PDP) for the MRT project already established, we see three other significant positive developments that would lend a further kick to Gamuda’s share price:
(i) There are strong indications that the overall cost for the Sg. Buloh-Kajang line could be higher than expected at RM20bil (our earlier estimates: ~RM12bil).
(ii) By extension, this may imply more scope of works for Gamuda for the entire system – which will reportedly cost over RM50bil against the initial estimate of RM36bil.
(iii) Balance sheet risk has been substantially reduced - where this massive project would likely now be funded via an MoF-appointed SPV.
• FY11F property pre-sales target of RM1bil may surprise on the upside, with ~ RM600mil achieved in 1H against unbilled sales of ~RM760mil. In Vietnam, Gamuda City is finally on track for its debut launch in July/August 2011 pending receipt of the first batch of land titles.
• Concerns over the Middle East region have been largely overdone, we believe. Gamuda’s exposure to the region is only ~RM200m or less than 5% of its outstanding orderbook of RM5.5bil.
• Management is selectively eyeing opportunities in the Middle East, notably in Qatar – although its immediate focus is still on crystallising large-ticket domestic contract opportunities, notably the Klang Valley MRT job flows.
• Gamuda is slated to release its 2QFY11 results tomorrow evening. As at end February, its foreign shareholding stood at 34% (end-Dec 2010: 36%).
OFF THE BLOCKS
• Fair value raised to RM4.25/share
We are maintaining our BUY recommendation on Gamuda Bhd with the fair value raised to RM4.25/share (previously: RM4.20/share) – based on a 5% discount to its sum-of-parts value.
We have incorporated the following key assumptions into our earnings forecast:
(i) Contributions from the new Sg. Buloh-Kajang MRT line;
(ii) Targeted launch of the Made Mansions development (GDV: RM250mil) in FY12; and
(iii) Further delays in the Ipoh-Padang Besar Double Tracking Project.
Near-term, we expect Gamuda’s share price to track increasing news flow momentum on the Klang Valley MRT project (See Table 1).
MRT PROJECT: ONE STEP CLOSER
Over the last two months, we sensed that newsflow on the Klang Valley MRT project has been gaining traction – implying that the much-awaited project is fast taking shape. Indeed, the Sg. Buloh-Kajang route is the first major line under the MRT system that will likely take
off first. It would reportedly cost around RM20bil against our earlier estimates of RM12bil.
By extension, a major but pleasant surprise is that the total cost for the entire line could now expand to over RM50bil from the RM36bil sum being put in by the Gamuda-MMC JV under its original proposal.
Taken together, this elevates Gamuda to a strong position as an early beneficiary of the MRT project. After all, Gamuda had recently been appointed as the project delivery partner (PDP) together with MMC Corp Bhd. The Gamuda-MMC JV has also been accorded the first right of refusal for the tunnelling package estimated at ~RM7bil (or 40% of overall project value).
• Pre-tenders for Sg. Buloh-Kajang line may be out by next month
During a packed briefing held for contractors by Syarikat Prasarana Negara Bhd (SPNB) earlier this month, more details were revealed on the Sg. Buloh-Kajang MRT system.
This new line would be the first to take off under the Klang Valley MRT project. The total track length measures 51km – where the underground portion is ~9.5km long.
The map of this new inner-city track – dubbed the blue line - is now open to feedback from various stakeholders, including residents of the affected areas.
Pre-qualification tenders for work packages under the Sg. Buloh-Kajang Line may commence next month – with soil testing works already well underway.
We gather that the total cost of this new line is approximately RM20bil – RM18bil for construction works and another RM2bil for rolling stock. This is somewhat higher than our initial estimates of around RM12bil (See Chart 1, Table 2).
Out of the RM18bil capex works, we understand that up to RM7bil or 40% is for the underground or tunnelling portion. While the tunnelling package would be subject to an open tender under a ‘Swiss Challenge’ - with international bidders invited - the MMC-Gamuda JV would still have the first right of refusal to match any competing offers.
Furthermore, we draw comfort with the fact that the JV has prior experience in undertaking specialist tunnelling works for the SMART tunnel project and Kaohsiung MRT system.
As for the balance RM11bil under the non-tunnelling portion, we gather that it would be sub-divided into a few sub-packages involving elevated structures, stations, track works as well as systems works. These work packages would be opened up for bids, bar the PDP (MMC-Gamuda JV).
Construction works on the Sg. Buloh-Kajang line are scheduled to kick off by July 2011 – ahead of its completion by 2016.
• Finding the best fit
The Sg. Buloh-Kajang line is expected to be delivered in 2016. The route is poised to take off first – as its alignment under the MMC-Gamuda JV’s proposal is almost similar to that of two other rail master plans being drawn up by DBKL and SPNB.
Under the JV’s original proposal, there would be three new lines measuring 156km, which would serve a radius of 20km from the city centre. The Red line runs from Sg.
Buloh through Kota Damansara to Sri Kembangan, while the Green Line runs from Sg. Buloh to Kajang. The Circle Line loops around the city centre.
Minconsult had earlier been hired by the federal government to look into any discrepancies in all three Proposals, and amalgamate them into a line that best fits the interest of various stakeholders.
According to a report in The Star, the top half of the RedLine and bottom half of the Green Line coincided with the alignment proposed by SPNB back in 2006. This resulted in the creation of the Sg. Buloh-Kajang line that links the Northwest-Southeast portion of the Klang Valley.
Meanwhile, we gather that SPNB hopes to finalise the entire network by June. The task is being carried out by the government-appointed independent consultant, Halcrow.
• Clearer demarcation of roles
Most importantly, there is now greater clarity on the roles of various stakeholders within this massive project – putting it on firmer ground to take off. With the Land Transport Commission Authority (SPAD) as the governing authority, the MoF would take care of the funding needs
via the creation of an SPV.
Syarikat Prasarana Negara Bhd (SPNB) remains as the asset owner and operator - assisted by independent checking engineers as well as the value management consultant – i.e. McKinsey & Co.
It would also handle the tendering process, although it is uncertain at this juncture if the role would be shared with the PDP – i.e. the MMC-Gamuda JV.
As the PDP, the MMC-Gamuda JV would be the ‘chariot master’. The JV is tasked with coordinating the procurement processes, supervising and ensuring the quality of the contractors as well as acquiring approvals from various local authorities.
The project has been given an added boost as it will likely be federal-funded. This may involve the creation of an SPV under the MoF to raise the necessary financing required.
• Actual cost for entire MRT network may surprise on the upside
The actual cost for the entire MRT project – estimated to be RM36bil initially – may well surprise on the upside, given that the costing was done based on building/raw material prices in 2009 (e.g. cement, steel, bitumen).
By extrapolating the costing for the Sg. Buloh Kajang Line, we estimate that the entire MRT network may now cost ~RM55bil or 50% higher than the original estimate of RM36bil.
FURTHER DELAYS TO DOUBLE TRACKING PROJECT?
• Likely to ask for second EOT
The Star reported recently that the completion date for the Ipoh-Padang Besar double-tracking project would be pushed back by another year – i.e. from December 2013 to November 2014. Transport Minister Datuk Seri Kong Cho Ha was recently quoted as saying that the delays were due to land acquisition issues – although no further details were revealed.
According to the report, construction works have reached the 65% mark as at end-February. On our estimates, the project accounts for circa 53% of Gamuda’s outstanding orderbook of RM5.5bil as at end-January 2011.
If this news is true, it would be a negative surprise for us – as we were under the impression that the niggling land acquisition issues on the northern portion of the route had been all but solved.
We opine that the MMC-Gamuda JV would be applying for a second extension of time (EOT) to complete this job.
Nevertheless, our previous forecast had already assumed a later completion date beyond the earlier target of December 2013.
Furthermore, the Federal Government will bear any increase in land acquisition cost. On the other hand, the JV is entitled to claim for any additional cost arising from the delays - e.g. prolongation cost, increases in building material prices – although these claims would likely be back-ended.
Taken together with a 1.5%-2.5% cut in our FY12F-13F EBITDA margin assumptions, we estimate the additional delays in project timeline to shave 10%-16% off our earnings forecasts over the next three years.
We have however not taken into account the fact that the JV has grounds to claim for any additional cost arising from delays in the work programme.
SCANT EXPOSURE TO THE MIDDLE EAST
• Existing Mid East exposure <5% of outstanding orderbook
Gamuda’s exposure to the Middle East region is only RM200mil+ or less than 5% of its outstanding order book of RM5.5bil.
This is largely confined to the NDIA Phase 1 & 2 works – under a JV with WCT. Balance of works is estimated to be around RM250mil – and is scheduled to be completed by 1Q11.
Prior to this, Gamuda completed two other projects in the Middle East – i.e. the RM650mil Sitra Causeway in Bahrain and the 42km-Dukhan Highway in Qatar.
While we gather that the Gamuda-WCT JV was not among the finalist for additional stretches along the Dukhan Highway (central portion), it is still eyeing opportunities in Qatar.
Furthermore, we continue to hold the view that pockets of unrest within the Middle East/North African (MENA) region is unlikely to spread to the larger Gulf Cooperation Council (GCC) markets such as Qatar, Abu Dhabi and Saudi Arabia.
Notably, Gamuda is still eying opportunities in Qatar – whereby press reports indicate that the oil-rich gulf state has budgeted for over US$100bil to be spent as part of its preparations to host the 2022 Fifa World Cup.
Gamuda MD Datuk Lin Yun Ling was previously quoted as saying that it would be prepared to bid for the US$45bil Qatar MRT system once more details are unveiled later this year. The MRT system forms part of the key transport infrastructure for Doha – Qatar’s capital city ahead of the 2022 FIFA World Cup.
But, our recent conversations with its management indicated that the group would not be too overzealous in bidding for future jobs in the Middle East. Rather, the immediate focus is on capitalising on the Klang Valley MRT project (See Table 3).
UPSIDE TO PROPERTY SALES
• Pre-sales target may be revised upwards
We understand that Gamuda achieved new property sales of circa RM250mil in 2QFY11 against RM350mil in 1QFY11 – bringing the 1HFY11 total to RM600mil. Its unbilled sales stand at approximately RM760mil.
Certainly, the sales momentum in 1H still held up pretty well despite earlier concerns over a potential softening in physical transactions due to the government’s pre-emptive moves to cool the property market (e.g. tightening of the loan-to-value cap).
More importantly, this may indicate some upside to its existing pre-sales target of RM1bil (FY10: RM820mil).
In terms of sales mix, its Bandar Botanic project in Klang is now the group’s top driver by value. In addition, the response to Jade Hills in Kajang is gradually gaining traction – where connectivity to the development would likely be enhanced with the confirmation of the Sg. Buloh-Kajang MRT line.
Further supplanting its domestic sales is the imminent debut of the Madge Mansion project in FY12. This highend development is nestled near Jalan Madge within the upscale Ampang area. Gamuda intends to launch 50 units of condominiums priced at about RM1,200/psf to RM1,300/psf (GDV: ~RM250mil).
In Vietnam, we gather that its Celadon City (Ho Chi Minh) is slated for launch later this month – with an indicative pricing of about US$1,000/sq m.
As for Gamuda City (formerly known as Yenso Park), we take comfort that the project is finally on track to be launched by July/August 2011 – as the first batch of land parcels (~50 to 60 acres) is due to be allotted within the next one to two months. For a start, the group intends to
launch lower-end condominium units initially priced at ~US$1,200/sq m.
