(Sept 17, RM3.60)
Maintain buy with an unchanged target price (TP) of RM4.65: Gamuda Bhd is a step closer to solidifying its role in the Penang Transport Master Plan (PTMP) with the project delivery partner (PDP) agreement to be signed by the fourth quarter of calendar year 2019 (4QCY19). This should pave the way for project awards in second half of calendar year 2020 (2HCY20).
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 Taiwan and Australia 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 the delayed government projects are eventually revived. Our earnings are above consensus (assume no dilution from warrants) and our TP is at the high end. Even at our TP of RM4.65, the stock trades at 15 times of financial year ending July 31, 2020 (FY20) earnings per share which is below its five-year mean.
The most important catalyst for Gamuda, and the sector, is the revival of key infrastructure projects. Gamuda’s strong reputation, based on work for the MRT Line 1 and 2, as well as its previous appointment as PDP for the PTMP, will put it in the driver’s seat to clinch other key government projects — high-speed rail, MRT3 and Bandar Malaysia — when these are revived. Key risk to our view is a slower-than-expected rollout of projects. — AllianceDBS Research, Sept 17