Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily on May 17, 2019

Gamuda Bhd
(May 16, RM3.20)
Maintain buy with a higher target price (TP) of RM4.30:
Gamuda Bhd is a step closer to solidifying its role in the Penang Transport Master Plan (PTMP) with key approvals received. This will pave the way for project awards in the second half of financial year 2020 forecast (2HFY20F).

A key positive would be funding by the federal government, which would preclude the need to raise bridging financing and ease working capital requirements. Besides eyeing the revival of the Mass Rapid Transit 3 (MRT3) project, Gamuda remains committed to two key overseas markets — Taiwan and Vietnam — which offer better margins and less competition.

We expect larger contractors with reputable track records and strong balance sheets (like Gamuda) to emerge as winners when delayed government projects are eventually revived.

Our earnings are above consensus and our revised TP is at the high end. Even at our TP of RM4.30, the stock trades at 15 times FY20F earnings per share which is below its five-year mean.

The most important catalyst for Gamuda, and the sector as a whole, is the revival of key infrastructure projects. This is already happening. Gamuda’s strong reputation, based on work for the MRT Line 1 and 2, as well as its previous appointment as project delivery partner for PTMP, will put it in the driver’s seat for revival of other key government projects — high-speed rail, MRT3 and Bandar Malaysia.

Our sum of parts-derived TP of RM4.30 assumes some expectations of new wins from PTMP and discounts for its highway tolls.

Key risks to our view included slower-than-expected roll-out of projects. While there are signs of key projects being revived, delays would result in negative earnings for Gamuda. — AllianceDBS Research, May 16

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