(Dec 17, RM2.22)
Maintain reduce with a lower target price (TP) of RM2.12: Gamuda Bhd’s first financial quarter ended Oct 31, 2018 (1QFY19) core net profit of RM226.2 million made up 28 to 29% of the consensus and our full-year forecasts.
We deem this to be broadly in line we expect weaker mass rapid transit 2 (MRT 2) joint venture (JV) profit from 2QFY19 given the timing of cost rationalisation and conversion into a turnkey model.
We also believe property sales could be weak.
The bulk of the 15.7% year-on-year decline in 1QFY19 core net profit came from the loss of contributions from the Splash water treatment concession. The six sen interim dividend per share declared was in line with our expectations.
The construction segment’s 9% pre-tax margin for 1QFY19 did not reflect the impact of MRT 2 cost rationalisation and the forgone 6% project delivery partner (PDP) margin as a result of the conversion into a turnkey contract.
Recall that in November 2018, the MMC-Gamuda JV’s contract value for MRT2 (SSP Line) was reduced by 22%, while the PDP model was converted into a fixed-price turnkey model.
During the result briefing, it guided for an about 5% to 6% construction pre-tax margin for the coming quarters.
Gamuda’s property development arm has set its FY19 sales target at RM4 billion, which we feel may be a tall order amid the expectation of a muted property market in Malaysia.
The sales target consists of RM2.3 billion worth of local properties, nearly double FY18’s RM1.2 billion. Nonetheless, the target will be supported by RM2.3 billion unbilled sales.
Gamuda’s construction order book had swollen by 78% quarter-on-quarter to RM11.8 billion as at end-October 2018.
However, Gamuda noted that its order book also includes several packages of domestic building contracts with a combined value of RM900 million that it has secured year to date (not announced as it did not meet Bursa’s threshold).
The group aims to bid for rail contracts in Singapore, Australia, Vietnam and Taiwan. We believe this could take some time to materialise.
Our FY19 to FY21 earnings per share (EPS) forecasts are intact.
We have maintained our “reduce” call, with a lower TP, as we updated for balance sheet items (an unchanged 40% discount to revalued net asset value).
Post-MRT2 cost rationalisation and cancellations of MRT3 and the Kuala Lumpur–Singapore high-speed rail project, Gamuda has emerged as the biggest loser in the rail segment’s downturn.
An upside risk is a revival of mega rail contracts. — CGSCIMB Research, Dec 16