This article first appeared in The Edge Financial Daily on January 17, 2020

Gamuda Bhd
(Jan 16, RM4.05)
Upgrade to buy with a higher target price (TP) of RM4.50: Gamuda Bhd’s replenishment prospects are improving with the project delivery partner (PDP) agreement for the Penang Transport Master Plan (PTMP) expected to be finalised soon. We upgrade Gamuda to “buy” with a higher revalued net asset value (RNAV)-based TP of RM4.50 (up 23%) after revising our assumptions.

The revival of major rail projects, such as the Kuala Lumpur-Singapore High Speed Rail (HSR) and Klang Valley Mass Rapid Transit Line 3 (KVMRT3) in 2020 could further rerate the sector with Gamuda as a prime beneficiary. Valuations are undemanding at 13.3 times estimated financial year ending July 31, 2021 price earnings ratio.

We believe SRS Consortium (60%-owned by Gamuda) is close to finalising its PDP agreement with the Penang state government. Backed by a federal government guarantee, the state would be able to raise up to RM10 billion of bonds to kick-start the Bayan Lepas Light Rail Transit project (estimated to be RM8 billion) under the PTMP.

The official roll-out of the PTMP would provide earnings visibility over the development period. As for the Pan Island Link 1 (estimated to be RM8 billion) and Penang South Reclamation (estimated to be RM16 billion) projects, both also under the PTMP, we understand that they are still in the midst of securing financing.

This year could see the revival of two major rail projects: The Kuala Lumpur-Singapore HSR and KVMRT3 (Circle Line). The Malaysian and Singapore governments have decided on a deadline (May 31, 2020) to decide on the status of the HSR project. The KVMRT3 is also understood to be in discussion to be revived albeit at a much lower cost of RM22.5 billion (a 50% discount).

Both rail projects will provide significant replenishment opportunities to contractors and Gamuda. With its vast experience in local rail projects, it is a potential beneficiary.

We have also now imputed the investment cost of Gamuda’s two industrialised building system plants into our RNAV calculation. However, our earnings forecasts are unchanged, pending further details of the PDP terms of the PTMP. — Maybank IB Research, Jan 14