KVDT2 retendering, possible ECRL revival seen positive for Gamuda

This article first appeared in The Edge Financial Daily, on January 11, 2019.
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Gamuda Bhd
(Jan 10, RM2.79)
Maintain reduce at an upgraded target price (TP) of RM2.45.
Gamuda surged 12% yesterday (+20% year to date). We attribute this to the recovery of sentiment on the overall construction sector, which appears to be triggered by recent news on the retendering of Klang Valley Double Tracking (KVDT) phase 2 and possible revival of the East Coast Rail Link (ECRL), albeit downsized; ECRL remains suspended and under negotiations. Also, the management’s new alternative strategy of pursuing overseas contracts and the final approvals for the Penang Transport Masterplan in the first quarter of 2019 (1Q19) may signal to investors that the worst could be over for Gamuda’s share price

However, we take a more cautious stance on the sector’s outlook in the first half of 2019 (1H19). News on the retendering of KVDT2 is not new, as it was mentioned in Budget 2019. Though this can be viewed positively in terms of a clearer visibility of contract flows in 1H19, it remains to be seen whether the outcome of the project structure, value of packages and tender details would be lucrative. We gather from our channel checks that the KVDT2 tenders could be fairly competitive, in view of the cost revision and excess capacity of rail contractors which would be keen to put in a bid following the cancellation of other rail jobs.

Post Malaysia’s general elections (GE) in May 2018, Gamuda’s share price hit its five-year low of RM2.02 on Oct 10. Though it ended the year higher at RM2.29, that was still a massive 53% below its end-2017 level, making it one of the worst performing contractors in 2018. Despite the stock’s sentiment-driven rerating on Wednesday, overall sector job replenishment outlook remains subdued in the second half of 2019 forecast (2H19F), in our view, given the shortage of new large-scale government contracts which typically appeal to big contractors like Gamuda

Our FY7/19-21F earnings per share (EPS) are unchanged. We keep our “reduce” stance as we believe its current share price has run ahead of the actual outcome of KVDT2 and ECRL. However, our TP rises from RM2.12 to RM2.45 as we narrow our revalued net asset value (RNAV) discount from 40% to 30% to reflect investors’ less-bearish sentiment on rail contractors’ chances of replenishing their order books in 1H19.

Upside risks to our call are:

i) success in KVDT2 tenders with a sizeable job win; and

ii) revival of exposure to ECRL, post-contract downsizing outcome, by mid-2019.

Unsuccessful bids for KVDT2 and ECRL are potential derating catalysts. — CGSCIMB Research, Jan 10