This article first appeared in The Edge Financial Daily on March 20, 2020

Gamuda Bhd
(March 19, RM2.49)
Upgrade to hold with a fair value of RM2.84: A dividend yield of 4.5% per annum should provide a good support for Gamuda Bhd’s share price at the current level. The earnings upgrade is to reflect our new assumption that the RM2.36 billion toll concession disposal deal will not take place anytime soon (we previously assumed that it would happen in early 2020), following the change in the political landscape recently. This means Gamuda will now continue to recognise these recurring toll-road incomes during our forecast period.

We expect Gamuda’s first half of financial year 2020 forecast (1HFY20F) results, due next week, to be RM340 million-RM350 million at the net level (relatively flat year-on-year versus a RM345.2 million net profit registered for 1HFY19). This would be broadly in line with expectations at 56% and 51% of our revised full-year forecasts and consensus estimates respectively.

MMC Corp Bhd (Gamuda’s joint-venture [JV] partner in the mass rapid transit [MRT2] project) made the following observations of its fourth quarter FY19 (4QFY19 [October-December 2019]) results announced recently, i.e. “lower work progress from the Klang Valley MRT-Sungai Buloh–Serdang–Putrajaya (KVMRT-SSP) Line (MRT2)... offset by a reversal of provision no longer required at the double-track project (Ipoh-Padang Besar electrified double-tracking project)”.

Taking the cue from these, we expect Gamuda for 2QFY20 (November 2019-January 2020) to recognise less profits from the MRT2 project (its key active project at present), but cushioned by a write-back (we believe, relating to expired defect liability) from the Ipoh-Padang Besar electrified double-tracking project that we estimate at RM60 million-RM70 million. To recap, MMC Corp was also Gamuda’s JV partner in the RM12.5 billion Ipoh-Padang Besar electrified double-tracking project with a construction period spanning from 2008 through 2014.

We believe the recent change in the political landscape has not altered the subdued outlook for the local construction sector. Given the still elevated national debt, coupled with the recent collapse of oil prices that will hurt petroleum revenues, we believe the government has very limited room for fiscal manoeuvre, meaning that it is unlikely to roll out new public infrastructure projects in a major way over the short term, such as the MRT3 and KL-Singapore high-speed rail.

We believe that the Penang Transport Master Plan project is now unlikely to kick-start in the second half of 2020 given the change in the political landscape. — AmInvestment Bank, March 19