KUALA LUMPUR (Oct 14): AmInvestment Bank Bhd has maintained its "underweight" call on Gamuda Bhd at RM3.75 with a fair value (FV) of RM2.84, and said valuations of construction stocks, including Gamuda, have run ahead of their fundamentals in the heat of the euphoria sparked by the recent revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects.

The FV was based on the sum of parts (SOP), valuing Gamuda's construction business at 10 times forward earnings.

In the Budget 2020 announcement last Friday (Oct 11), Finance Minister Lim Guan Eng said the Cabinet has approved the takeover four Klang Valley highways, which will be funded via government-guaranteed borrowings.

The highways are Shah Alam Expressway (KESAS), Damansara-Puchong Expressway (LDP), Sprint Expressway (SPRINT) and SMART Tunnel (SMART).

According to the research house, this is in line with its expectations as its forecasts has already assumed the sale of Gamuda's toll road assets to the government, to be completed in January 2020.

Hence, Gamuda only recognises six-month contributions from the highways in FY20F and none from FY21F onwards.

"Our SOP valuation for Gamuda has also reflected the RM2.36 billion proceeds Gamuda is to receive from the disposal," AmInvestment said.

AmInvestment believes that Gamuda is getting a fair deal on the disposal (discounted cash flow valuation at a discount rate of about 6% based on its estimates) and is mindful of the change in the company's earnings profile after the disposal.

"With reduced recurring toll road earnings (that make up about 35-40% of Gamuda's total earnings), the defensiveness of Gamuda's earnings will be eroded, resulting in a higher risk premium," it said.

AmInvestment noted that Gamuda is searching for new businesses with recurring incomes to fill the vacuum.

Gamuda believes that the RM46 billion Penang Transport Master Plan (PTMP) is a good fit as it could potentially generate recurring project delivery partner fee for more than a decade.

"The not-so-good news is that the PTMP project was not mentioned at all in the budget speech (which means the chances of it getting financial assistance from the federal government are slim), so was the MRT3 project (that should sustain Gamuda's construction earnings after the completion of MRT2 in 2022)," the research house stated.

At 9.45am, Gamuda rose 1.07% or 4 sen to RM3.79 for a market capitalisation of RM9.37 billion.