This article first appeared in The Edge Financial Daily on June 29, 2018

Gamuda Bhd
(June 28, RM3.23)
Upgrade to buy from neutral with a lower target price (TP) of RM3.70: Gamuda’s nine-month financial year 2018 (9MFY18) earnings of RM614.9 million (+23.2% year-on-year [y-o-y]) registered a positive accounting for a 76% of our and a 76% of street’s estimates. Its 9MFY18 earnings are supported by strong engineering and construction profit before tax (PBT) from RM152.2 million in 9MFY17 to RM229.2 million in 9MFY18 (+50.6% y-o-y).

Earnings imbued by on-track progress billings. The healthy result is due to on-track progress billings of Pan Borneo (Pantu-Btg Skrang, 25% progress) and underground works MRT Line 2 (31.5% progress). The on-track development is much welcomed news giving a potent shot of optimism for Gamuda illustrating its forte in engineering and construction. In so far, we are not predicting any hiccup pertaining to its underground work from Bandar Malaysia to Chan Sow Lin station as the project team has the necessary experience during the tunnelling of the SMART Tunnel. This is due to the karstic limestone and cavernous soil factor of Kuala Lumpur.

We maintain our earnings assumption for FY18 and FY19 on the basis of Gamuda’s estimated unbilled order book of RM12.8 billion, strong pickup in property sales in Singapore which we have anticipated in FY16 and Celadon City, Vietnam, and steady contribution from concessions asset. We are anticipating positive news from the Penang Transport Master Plan (PTMP) which will impact Gamuda’s earnings trajectory. Our channel checks reveal that the projects under PTMP will mostly pull through, thus potentially giving a boost to Gamuda’s order book by another +20%.

Therefore, we upgrade to “buy” with an adjusted TP of RM3.70 per share rolling over FY19’s earnings per share of 11.9 sen to our mid-range price-earnings ratio of construction sector target of 12 times due to the grim backdrop of the construction sector and recognising regional negative sentiments for the mid-term outlook. — MIDF Research, June 28