This article first appeared in The Edge Financial Daily on January 21, 2020

Gamuda Bhd
(Jan 20, RM4.11)
Maintain neutral with an unchanged target price (TP) of RM3.70: Based on the Bursa Malaysia announcement last Friday, Gamuda Bhd and MMC Corp Bhd (a 50% joint-venture partner) have inked two agreements executed with Mass Rapid Transit Corp Sdn Bhd (MRT Corp). The two agreements are: i) a supplemental agreement to the project delivery partner (PDP) agreement between MMC Gamuda KVMRT (PDP SSP) Sdn Bhd and MRT Corp; and ii) a novation agreement among PDP SSP, MMC Gamuda KVMRT (T) Sdn Bhd and MRT Corp. The execution of the agreements is to formalise the role of MMC-Gamuda to deliver and be responsible for the design, execution and completion of the entire MRT Sungai Buloh-Serdang-Putrajaya Line (MRT2), for both above ground and underground, on a turnkey basis.

It is worth noting that this process managed to yield savings of RM8.82 billion — from RM39.35 billion to RM30.53 billion — a 22.4% reduction from the original cost. The factors that attributed to the cost savings were: i) a conversion to the turnkey model to save on PDP fees; ii) rationalisation of the allocation of reimbursable; iii) contingencies and provisional sums; iv) the postponement of Bandar Malaysia stations; and v) scope rationalisation of electrical and mechanical system works. However, the savings will not be immediate since it is spread over 20 years.

The current work progress of the MRT2 is now 70% complete. Major works are expected to be completed in 2022, and by 2023 the MRT2 is expected to become fully operational. The first phase (the Kwasa Damansara station to the Kampung Batu station) will begin operating in July 2021. Meanwhile, the second phase (the Kampung Batu station to the Putrajaya Sentral station) will become operational by January 2023. Moving forward, the MRT2 project is anticipated to be completed on time and under budget.

The execution of the two agreements is expected to have no effect on financial year ending July 31, 2020 (FY20) earnings of the group.

At this juncture, we maintain our “neutral” recommendation on Gamuda with an unchanged TP of RM3.70, pegging its FY21 earnings per share to price-earnings of 14 times. — MIDF Research, Jan 20