Gamuda Bhd
(Jan 16, RM5.02)
Maintain buy with a target price of RM6: The probability of the mass rail transit (MRT) project being delayed or shelved is low because it is deemed a high-multiplier and top priority Economic Transformation Programme project. The project may be even more vital amid the weak oil prices to generate growth and create jobs.

Moreover, the financing of the MRT is deemed off balance sheet (appears as contingent liability to the government) and will not directly affect budget deficit numbers.

We expect Gamuda to formalise the project delivery partner (PDP) agreement by the second quarter of financial year 2015 (2QFY15) with a similar fee structure as Line 1, and for it to return as tunnelling contractor (and add RM5 billion of high-margin jobs to its order book).

Gamuda is actively pursuing the RM27 billion project through the PDP approach. The request for proposal will close in February while the PDP job would be awarded by the third quarter of calendar year 2015.

As payment is via land reclamation rights, there will be a cash constraint but this will be partly mitigated by Gamuda’s ability to sell the land rights to other developers when they are progressively paid. The key determinant for this project is the ability to agree on land cost and taking a longer- term view on the property market.

Should Gamuda be successful in clinching this project, it will unlikely pay out special dividends from the sale of Syarikat Pengeluar Air Selangor Holdings Bhd (Splash) (RM1billion or RM0.43/share for its 40% stake).

Gamuda’s earnings will peak in FY15. There could be a one-year earnings gap in FY16 forecast as MRT Line 1 will be largely completed and MRT Line 2 will only start to contribute meaningfully in FY17 forecast.

We adjusted our earnings to reflect these, and reduced property pre-sales values for FY15 to FY17 after imputing slower property sales at Horizon Hills in Iskandar Malaysia. The longer-term growth story for Gamuda is intact with the MRT Circle Line coming in after Line 2. — AllianceDBS, Jan 16

This article first appeared in The Edge Financial Daily, on January 19, 2015.