Investment Highlights

• We cut our FY20–21F net profit forecasts by 4% and 6% respectively, and trim our FV by 2% to RM2.84 (from RM2.91) based on “sum of parts” (SOP), valuing its construction business at 10x forward earnings, in line with our benchmark forward target P/E of 10x for large-cap construction stocks (Exhibit 2). Maintain UNDERWEIGHT.

• Gamuda's FY19 core net profit of RM682.7mil met our forecast and the consensus estimates. Its FY19 core net profit declined 18% YoY due to weaker performance from the construction segment (downsized MRT2 contract) and concessions (absence of contribution from Splash after its disposal), partially offset by better showing from the property segment (strong sales and firm margins in Vietnam).

• Gamuda recorded RM3.1bil property sales in FY19, with overseas projects (largely in Vietnam) contributing about two thirds of the total, while the balance came from local ones. This was below its previous guidance of RM3.5– 3.8bil largely due to the weaker-than-expected sales from its new local township projects in the Klang Valley, i.e. Gamuda Gardens (near Rawang), Gamuda Cove (near Nilai) and Twentyfive.7 (near Kota Kamuning) on the back of the still lethargic local property market.

• For FY20F, Gamuda cut its property sales target to RM4bil (from RM4.5bil), with the reduction coming solely from local projects. To bring ourselves in line with the latest guidance, we reduce our FY20F property sales assumption to RM4bil (from RM4.4bil), resulting in the earnings downgrade as mentioned.

• Key highlights from the briefing last Friday are: 1. Gamuda said that it is acquiring a 50% stake in a smallish family-owned Australian construction company called Martinus Rail for some “small money”. Founded and run by entrepreneur Treaven Martinus, the railway track specialist boasts a staff strength of about 270, annual turnover of about A$40mil and an order backlog of about A$200mil. The company has been generally profitable in recent years (but did slip into losses occasionally). The acquisition will give Gamuda an immediate presence in the construction market in Australia (in addition to the two offices in Sydney and Melbourne Gamuda already set up a few months ago). Gamuda’s ultimate prize is a piece of action in the A$20bil rail-based works in Australia.

Gamuda 30 Sep 2019

AmInvestment Bank Bhd 2

We believe that building a presence, gaining a foothold and ultimately being able to make money in a new market, is no stroll in the park. We believe investors should be mindful of the potential hefty cash burns Gamuda would probably have to suffer during the initial years, which also by no means guarantee a success in the new market. We reckon Gamuda’s decisive move to venture into a total new construction market in Australia, perhaps, is a manifestation that the best days of the Malaysian construction sector are already behind us. 2. With regards to the RM2.36bil toll road disposal, Gamuda said that the ball is in the government’s court (and it is not in the position to comment on several alternative national toll road takeover deals in the market proposed by numerous parties) and it is hopeful that the cabinet will make a decision by the new deadline in end-Oct 2019. 3. For the Penang Transport Master Plan (PTMP) project, Gamuda reiterated its guidance for physical work to start in 2H 2020. It said that it is providing assistance to the Penang state government to secure funding, for a start, of about RM2–2.5bil to finance the reclamation of the 790-acre Smart Industrial Park of the 2,300-acre Island A. Once completed, the industrial park will be sold and the cash flow and profit will be ploughed back to fund the LRT, Pan Island Link highway and further reclamation works under the PTMP project.

• We maintain our view that valuations of construction stocks, Gamuda included, have run ahead of their fundamentals in the heat of the euphoria sparked by the recent revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects (more so, Gamuda may not even participate in the ECRL project after all). We believe the fact remains that given the still elevated national debt, the government has no choice but to remain steadfastly committed to fiscal prudence which means the revival of the ECRL project could be a “zero-sum game” as it impedes the government’s ability to implement other public infrastructure projects.

• We sense Gamuda’s high “concentration risk” in the PTMP project. In the event the project fails to get off the ground as scheduled (2H 2020) or Gamuda being given a reduced role in the project (as the project delivery partner [PDP] model is no longer favoured by the federal government, as manifested in the cancellation of the PDP model in the construction of LRT3, MRT2 and Pan Borneo Highway Sabah, while a decision is pending for Pan Borneo Highway Sarawak). We are also mindful of the potential hefty initial “school fees” Gamuda may have to pay in order to gain a foothold in the Australian construction market.

Source: AmInvest Research - 30 Sept 2019