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Gamuda’s construction projects to provide income catalyst

THE outlook on construction and property player Gamuda Bhd remains positive, despite potential downsides in the domestic construction sector and the group’s decision to accept a government takeover offer for its highway concessions.

Gamuda’s board last week accepted the RM6.2 billion offer from the Minister of Finance Inc to buy all of Gamuda’s equity in four toll concessions.

The group also reported a 14.6% year-on-year (YoY) fall in net profit to RM175.99 million for the third quarter ended April 30, 2019 (3Q19), as it stopped recognising its share of profits from Syarikat Pengeluar Air Selangor Holdings Bhd after selling its 40% stake in the water treatment firm last year to the Selangor state government.

The group’s 3Q19 revenue fell 16.1% YoY to RM1.04 billion.

BIMB Securities Sdn Bhd analyst Mohamad Khairul Fahmi said the stock remains his sector favourite, despite uncertainty in the construction sector and the earnings vacuum left by the sale of Gamuda’s highway and water treatment concession businesses.

“Gamuda remains our sector favourite given its RM10 billion orderbook, RM2.2 billion in unbilled sales and potential special dividend in view of the group’s growing cashpile.

“The company has good fundamentals. It will be able to secure smaller construction contracts and is building up a presence overseas to mitigate domestic risks,” he told The Malaysian Reserve.

In a report last Friday, Mohamad Khairul said Gamuda’s management remains upbeat on the local construction sector amid the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia projects, with the latter potentially leading to the revival of the proposed high-speed rail project as well.

On another note, Gamuda expects to kick off the Penang Transport Master Plan (PTMP) project from mid-2020 onwards.

Mohamad Khairul, however, remains cautious on PTMP and other mega infrastructure projects.

“There’s still nothing decisive yet on PTMP, which has been talked about for the past two years. Perhaps once the funding and approval is confirmed, it will be a good catalyst for Gamuda,” he said.

Mohamad Khairul opined that the market has “slightly overreacted” to the revival of the ECRL and Bandar Malaysia, as these are the only two projects that have been revived so far, yet funding and timelines have not been announced.

Gamuda shares climbed 1.1% to RM3.76 at the close last Friday as investors reacted positively to its acceptance of the highway takeover bid.

The stock was the biggest contributor to the 0.23% advance in the Bursa Malaysia Construction Index on the same day, leading the index up to 219.06 points. The construction gauge has risen 40.61% year-to-date (YTD).

Gamuda has surged 60.56% YTD and 15% in the past 52 weeks. It currently has nine ‘Buy’ calls, eight ‘Hold’ recommendations and five ‘Sell’ calls from analysts surveyed by Bloomberg.

The four highway companies involved in the takeover deal are Lingkaran Trans Kota Holdings Sdn Bhd (Litrak), Sistem Penyuraian Trafik KL Barat Holdings Sdn Bhd (Sprint), Kesas Sdn Bhd and Projek SMART Holdings Sdn Bhd.

Gamuda holds a 44% stake in Litrak, 52% in Sprint, 70% in Kesas and 50% in SMART. Its share — based on its effective interest in these highways — is worth RM2.36 billion in equity value.

The buyout offer follows the government’s announcement in February that it intends to acquire the four highways in the Klang Valley, as promised in its election manifesto.

“I think it’s a fair valuation for the highway concessions. It’s also a good time for Gamuda to monetise the business, as there is risk from regulatory policies and reduction in traffic on the highways due to greater public transport connectivity and government subsidies for public transport usage.

“Losing the recurring income from the highway business is no issue — they can seek for other projects. They’re already building up their tenders overseas,” Mohamad Khairul added.

On the property development side, the group has unbilled sales of RM2.2 billion that can sustain it for roughly two years, plus ample landbank for further development.

JF Apex Securities Bhd in a report last Friday maintained a ‘Hold’ call, citing a likely improvement in the outlook for the construction sector given the revival of mega projects.

“Assuming the deal (for the four highways) is accepted by the respective associated companies and joint-venture company, we shall cut our core net profit (estimate) by 18% to 22% in the financial year ending July 31, 2019, to reflect a loss of income in toll highways,” it added.

BIMB downgraded Gamuda to ‘Hold’, although it said the stock still possesses sound fundamentals despite the absence of recurring income from the highway concessions.

Kenanga Investment Bank Bhd upgraded the stock to ‘Market Perform’ on the company’s affirmation of maintaining its existing dividend payout and indication of a special dividend following the sale of its highway concession business.

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