We  maintain  our  BUY  call,  forecasts  and  MYR5.45  FV  following Gamuda’s MYR875m  cash  offers to buy out partners which collectively hold a 70%  stake  in toll road concessionaire Kesas.  We are neutral on the deal as its impact on Gamuda’s fundamentals is mixed. We maintain our  view  that  Gamuda  is  the  best  proxy  to  public  infrastructure spending in Malaysia, particularly the Klang Valley MRT project.

• Making  a  bid  to  take  full  control  of  Kesas.  Gamuda  has  made MYR875m  cash  offers to buy out partners which collectively hold a 70% in  toll  road  concessionaire  Kesas  comprising  Perbadanan  Kemajuan Negeri Selangor, Amcorp Properties Bhd and Permodalan Nasional Bhd.
• We  are  neutral.  We  are  neutral  on  the  deal  after  considering:  i) valuations of the deal which we believe are fair;    ii) the positive aspects of the deal including its earnings accretive nature and that it will not alter Gamuda’s  plan  for  a  special  dividend  payout  on  the  disposal  of Gamuda’s  stake  in  Splash;  and  iii)  the  negative  aspects  of  the  deal including  the  impact  on  Gamuda’s  balance  sheet  and  the  opportunity cost it carries.
• Valuations.  The  deal  values  Kesas  at  about  10x  P/E  and  its  future cashflow at a discount rate of about 10%. On one hand, the deal could boost Gamuda’s FY15  earnings by MYR51m or 8%. On the other hand, it  could  raise  Gamuda’s  net debt  and  gear ing  to  MYR2.4bn  and  0.49x from MYR714m and 0.15x currently.
• Forecasts. Maintained, pending the completion of the deal.
• Maintain  BUY.  We  like  Gamuda  as:  i)  It  is  the  best  proxy  to  public infrastructure spending in Malaysia given its dominant role  in the Klang Valley  MRT  project;  ii)  It  has  secured  the  best  portions  of  the  Klang Valley  project  as  a  project  delivery  partner  (PDP)  (6%  fee)  and contractor for  the  high-margin tunneling  jobs;  and  iii)  It is likely to take the lead in reacting to new price catalysts  such as  Cabinet approval for Line  2 of  the  Klang  Valley  project  given  its  large market capitalisation, high beta and share liquidity. Our FV is unchanged at MYR5.45.

Proposes MYR875m Buyout For Kesas

Making  a  bid  to  take  full  control  of  Kesas.  Gamuda  has  made  MYR875m  cash offers to buy out partners which collectively hold a 70% in toll road concessionaire Kesas comprising: i) Perbadanan Kemajuan Negeri Selangor (MYR375m for its 30% stake);  ii) Amcorp Properties Bhd (MYR250m  for its 20% stake);  and iii) Permodalan Nasional Bhd (MYR250m for its 20% stake).  Kesas  holds a 30-year toll concession ending Aug 2023 for  the 35-km Shah Alam Expressway linking the Kuala LumpurSeremban Highway in the east and Pandamaran in the west.

We are neutral. We are neutral on the deal after considering: i) valuations of the deal which we believe are fair;  ii) the  positive aspects of the deal including its  earnings accretive nature and that it will not alter Gamuda’s plan for a special dividend payout on the disposal of Gamuda’s stake in Splash; and iii) the negative aspects of the deal including the impact on Gamuda’s balance sheet and  the opportunity cost it carries.

Valuations.  At  the  offer  prices,  the  deal  effectively  values  Kesas  in  its  entirety  at MYR1.25bn.  Based on Kesas’  latest  net profit of about MYR120m per annum, this translates  to  a  P/E  of  about  10x.  Also,  our  DCF  model  shows  that  at  an  NPV  of MYR1.25bn, the deal effectively discounts back Kesas’ cashflow over the remaining 10-year tenure of the concession at a discount rate of about 10%,  which we deem fair.  In  our  DCF  model,  we  assume  an  annual  traffic  volume  growth  rate  of  5.5% (Kesas reported a 5.5% growth in average daily traffic to 290,653 vehicles  in its latest financial year).  

Positive  aspects.  Ceteris  paribus,  based  on  our  estimates,  the  deal  could  boost Gamuda’s FY15 earnings by MYR51m or 8% (additional MYR84m net profit from the 70% stake, minus funding cost of MYR33m based on an interest rate of 5% and a tax rate of 25%).  We understand that to  a certain extent, this deal is “inspired” by the need to replace  the earnings vacuum left by the potential disposal of Gamuda’ s 40% stake  in water production concession Splash pursuant to the on -going Klang Valley water  restructuring  exercise spearheaded  by  the  Selangor  state government.  Also, during  our  conversation  with Gamuda,  the  company  stressed  that  the  deal  will  not alter its plan for a special dividend payout on the disposal of its  40% stake in Splash. To recap,  Gamuda is hopeful that the disposal  could be concluded by 1Q2014. It guided a net price tag of MYR2-2.2bn for Splash in its entirety that means Gamuda’s 40% stake could fetch as much as MYR800-880m. Assuming Gamuda is to return the entire amount to its shareholders, this will work out to b e 37-41 sen per share. Negative  aspects.  On  the  other  hand,  based  on  our  estimates,  the  deal  could increase  Gamuda’s  net  debt and  gearing  to  MYR2.4bn  and  0.49x  from  MYR714m and 0.15x as at Jul 2013, after factoring in the MYR875m consideration, coupled with the consolidation of MYR800m  Islamic  debt at Kesas.  The acquisition comes with a hefty opportunity cost to Gamuda in the sense that Gamuda’s war chest is effectively depleted and Kesas is not quite an asset or business with high growth prospects.

Forecasts. Maintained, pending the completion of the deal.

Risks  to  our  view.  These  include:  i)  risks  associated  with  the  Sg  Buloh  –  Kajang (SBK)  MRT Line project including delays, cost overruns  and potential changes to the project  delivery  partner  (PDP)  terms;  ii)  delays  in  the  rollout  of  Lines  2  &  3  of  the Klang Valley MRT project;  and  iii)  a prolonged slowdown in the property market in Vietnam.

Maintain BUY.  We believe  the  local construction sector will continue to do well as long as the MYR73bn Klang Valley  MRT project is intact. Given the scale and scope of the project, it entails the involvement of virtually all players along the value chain of the  sector,  from  project  delivery  partners  and  general/specialist  contractors,  to suppliers of precast segments and basic building materials. This will  keep  the sector busy until 2019.  While the Government may defer certain  mega projects  in its bid to narrow its  fiscal deficit and prevent further weakening in  its  current account,  we  are not  perturbed  as  none  of  these  are  as  critical  as  a  source  of  jobs  for  the  sector compared to the Klang Valley MRT project.

We  like  Gamuda  as:  i)  it  is  the  best  proxy  to  public  infrastructure  spending  in Malaysia  given  its  dominant  role  in  the  SBK  MRT  Line  project,  and  most  likely,  in Lines 2 & 3 of the Klang Valley MRT  project as well;  ii)  it has secured the best parts of the SBK MRT Line project, as a PDP  with a 6% fee and a contractor for the highmargin tunneling  jobs;  and  iii)  it is likely to take the lead in terms of reacting  to new price catalysts (for instance, Cabinet approval for Line 2 of the Klang Valley project), given its large market capitalisation, high beta and share liquidity. Our MYR5.45 FV is based on SOP (see Figure 2), valuing its construction business at 17x 1-year forward earnings, at a premium to our 1-year forward target P/Es  for the construction sector of 10-16x to reflect the group’s large market capitalisation and high share liquidity.

Financial Exhibits

SWOT Analysis

Company Profile
Gamuda is primarily involved in construction, property development, the operation of toll roads and production of treated water. It is the leading  player  in  public  infrastructure  in  Malaysia  by  virtue  of  its  project  delivery  partner  and  tunneling  contractor  roles  in  the construction of the Klang Valley MRT project.

Recommendation Chart

Source: RHB