Warrants Update: Short-term catalysts may spell upside for Gamuda-WD

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WITH a challenging year expected for both the construction and property industries, Malaysian conglomerate Gamuda Bhd remains a favourable investment pick due to its high recurring income base and steady revenue from existing mega projects.

The two factors should provide a buffer for any possible downside to the stock and bode well for Gamuda’s company-issued warrant, Gamuda-WD, which expires next May. The blue-chip stock has gained around 7% this year to close at RM5 on Dec 22, outperforming the FBM KLCI’s x% decline.

Several short-term catalysts may drive the stock over the next five months, including an increase in revenue contribution from property sales as well as the Klang Valley Mass Rapid Transit (KVMRT) Line 1 construction project, which should improve investor sentiment in the stock after a year of market-beating gains.

Gamuda-WD, which expires on May 25, carries a strike price of RM2.66 and has a one-to-one conversion ratio. The warrant has gained about 10% this year to close at RM2.28 on Dec 22, a modest 0.4% premium to the mother share.

Cap1047_WarrantsGamuda

Note that Gamuda-WD continues to trade at near-zero premiums to its mother share, which indicates an active buying interest in the warrant.

Maybank Investment Bank Research’s (Maybank IB Research) target price of RM6 for Gamuda’s stock implies a 20% upside to the latter’s Dec 22 close of RM5. Assuming zero premiums, Gamuda-WD would theoretically be worth RM3.34 (RM6 less RM2.66), or a 46% upside, if the research house’s fair value is reached.

In a Dec 17 note, Maybank IB Research analyst Chai Li Shin says Gamuda holds the advantage of having a strong balance sheet and recurring income from various concessions, which would mitigate the risks of a potential downturn in the economy.

“Gamuda is our top pick for the construction sector as it is a major beneficiary of major infrastructure projects. The RM5 billion Penang transport project is also a major catalyst for the group, which is a candidate for the project delivery partner (PDP) role.”

CIMB Research analyst Sharizan Rosely concurs, adding that other short to medium-term catalysts for Gamuda include the signing of the PDP terms for the KVMRT Line 2 project and the expected disposal of its 40%-owned Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) to the Selangor government.

“Gamuda’s stock is down about 9% from its 52-week high of RM5.31 and in our view, its current share price offers a good re-entry point. As for SPLASH, the change of leadership in Selangor should bring about better chances for Gamuda to divest at better prices than what was previously offered,” says Sharizan, who has pegged a fair value of RM5.99 on the company’s stock.

This article first appeared in The Edge Malaysia Weekly, on December 29, 2014 - January 4, 2015.