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This article first appeared in The Edge Financial Daily on October 15, 2018

Gamuda Bhd
(Oct 12, RM2.35)
Upgrade to buy with a target price of RM2.79:
Gamuda Bhd’s share price plunged to a multiple-year low of RM2.30, retreating 54.9% from the closing price of RM5.10 on the eve of the 14th general election (GE14).

The heavy selldown in the stock was triggered by a slew of concerns which included uncertainties arising from a change of government in Putrajaya after GE14, abolishment of tolls promised in Pakatan Harapan’s election manifesto, resulting in fear for its local toll road concessions being expropriated without being compensated fairly, cancellation of the mass rapid transit 3 (MRT3) project in which Gamuda was seen as a front runner in securing a substantial portion of the construction contract, postponement of the Kuala Lumpur-Singapore high-speed rail (HSR) in which the Malaysian Resources Corp Bhd (MMC)-Gamuda consortium was appointed the project delivery partner (PDP) for the northern section of the HSR project (but the signing of the PDP contract was subsequently called off), dimmer prospects for the construction sector following cancellations/suspension of several mega infrastructure projects post GE14, abrupt termination of the MRT2 underground package and reduction of works for MRT2 elevated packages.

MRT2 and the Pan Borneo Highway package in Sarawak are local as the construction division was primarily focusing on local projects due to the abundance of opportunities in the local construction sector before GE14.

It is understood that Gamuda is now exploring opportunities in the overseas markets, including Singapore. We believe it has the experience, capacity and right capabilities to secure and execute overseas projects as local demand has dwindled.

We have excluded earnings contributions from the MRT2 underground package after the government issued a media statement on the termination of the MMC-Gamuda joint venture (JV) as the contractor for the underground works. According to media, MMC-Gamuda would return to the negotiating table with four ministers to work out the gap and further reduce the cost for the underground package. Should an amicable solution be reached and the termination is reversed, it offers a potential upside to the share price.

Even if the renegotiation fails and the underground package is retendered, the MMC-Gamuda JV could participate in the retender.

We have maintained our financial year 2019 (FY19) to FY21 earnings forecasts.

It is valued at an undemanding price-earnings ratio multiple of nine times to 11 times, based on our FY19 to FY21 earnings projections, versus a 10-year average of 18.3 times. In terms of price-to-book ratio, the stock is at 0.75 times, versus the 10-year average of 1.8 times. — TA Securities, Oct 12

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