Gamuda - Tunnel largely in the bag Hold

- We maintain our HOLD recommendation on Gamuda with a revised fair value of RM3.72/share – pegging the stock at an unchanged 5% discount to its Sum-Of-Parts value. This is to account for (i) higher margin assumptions assumed for its construction division; and (ii) Recent increase in our fair value accorded to its 45%-owned toll associate, Litrak Holdings (from RM3.77/share to RM3.90/share).

- Quoting a statement from MRT Corp, the local press reported at noon-time today that the MMC-Gamuda JV has emerged as the winner of the tunnelling contract under the Sg.Buloh-Kajang (SBK) MRT project. The contract value is estimated at RM8.2bil, and makes up circa 30%-40% of the overall SBK line project cost. Construction works are scheduled to be completed by end-2016.  

- Prior to this, the MMC-Gamuda JV was among five parties that had earlier been pre-qualified for the tunnelling package. The other tenderers were the Hyundai-GadangChengal Jaya JV, Taisei Corp, Sinohydro Group Ltd and China Railway Group Ltd.

- The MRT Corp statement added that the MMC-Gamuda JV was chosen based on two important criterion: (i) The JV possessed the expertise and experience of undertaking similar works during the construction of the Stormwater Management and Road Tunnel (SMART) project; and (ii) It offered the best bid that was some 3.4% lower than the second-lowest offeror.

- We are not surprised by this latest news. We had earlier highlighted that the MMC-Gamuda JV was the front-runner for the SBK tunnelling job due to its status as the only wholly-owned local outfit that was pre-qualified, with the necessary pre-requisite in major tunnelling works. Furthermore, the JV had been given a 7.5% pricing advantage under the ‘Swiss Challenge’ method.

- But, our HOLD call on Gamuda remains. We reckon that market expectations of its chances in the MRT project have largely been built-in at current levels. 

- Flipside, the RM8bil Gemas-JB double tracking project appears to be the only fresh near-term catalyst for Gamuda. It is among three local-Chinese partnerships that have reportedly been pre-qualified for this job, where a decision could be known by mid-2012.  

- For leverage to the large-cap construction space, we prefer IJM Corp and WCT for the latter duo’s more exciting new contract pipeline going forward. Likewise, we like suppliers of building materials for direct exposure to the Klang Valley MRT project:- i.e. Lafarge Malayan Cement, Ann Joo Resources and Lion Industries.   

Source: AmeSecurities