(Sept 29, RM4.90)
Maintain add with a higher target price (TP) of RM5.97: Gamuda Bhd’s financial year ended July 31, 2016 (FY16) core net profit was 3% above our and 2% ahead of consensus forecasts. The overall results were broadly in line. The 8.3% decline in core net profit was largely expected, given the tail-end recognition of mass rapid transit Line 1 (MRT1) earnings and lower property development margins. FY16 marked an inflection point where new MRT2 earnings on the back of an all-time high order book of RM9 billion began to flow into FY17. The total 12 sen single-tier dividend per share for the full year was in line with our expectations.
Potential larger-value construction wins were the main positive surprise from Gamuda’s results briefing. Over the next 12 months, management targets to secure RM3 billion to RM4 billion worth of infrastructure projects. These could come from: i) light rail transit Line 3; ii) subcontract works for the Gemas-Johor Baru double-tracking rail project; and iii) Pan Borneo Highway in Sabah. The new guidance puts the value of each targeted package at about RM1 billion.
With the award phase of MRT2 underway, MRT Corp Sdn Bhd is now targeting to submit the feasibility studies for MRT3 by end-2016. MRT3 is likely to be largely underground and the most tunnel-intensive. The potential contract value could be substantially higher than the RM15.5 billion underground scope for MRT2 given the higher cost per kilometre. Gamuda has so far secured underground packages from MRT1 and MRT2 via the MMC-Gamuda joint venture (50:50).
Gamuda is positioning itself to tender for the RM30 billion-to-RM40 billion Kuala Lumpur-Singapore high-speed rail (HSR) project now that the project has better tender time visibility, which is end-2017. Its management highlighted that a project of this size and scale fits into the group’s expertise and track record. At this juncture, it only targets to tender for the civil works but remains open to the possibility of taking on a bigger role in the project. However, this would depend on the final project structure.
We raise our TP from RM5.92 as we roll over our valuation to end-2017 (still pegged to a 10% discount to revised net asset value). We continue to like Gamuda for its earnings turnaround in FY17 and exposure to large-scale rail projects. It remains our sector top pick. Downside risk is delay in job roll-outs but this is outweighed by the revival of job wins, sale of water asset and likely recovery in foreign shareholding (currently at a low of 22%). — CIMB Investment Bank, Sept 29