Gamuda - No impact from additional RM3.6bil cost for EDT job HOLD

- Maintain HOLD on Gamuda with an unchanged fair value of RM3.79/share – based on a 5% discount to its sum-ofparts (SOP) value.

- The Edge Financial Daily  reported that based on the Auditor General’s (AG) report for 2011, the Ipoh-Padang Besar electrified double tracking (EDT) project could cost at least RM3.6bil more due to delays.

- These would include: (i) Land acquisitions (RM698mil); (ii) Compensation to squatters (RM38mil); (iii) Consultancy fees (RM257mil); Tenaga Nasional Bhd’s connection charges (RM203mil); Interest charges on a Bank Pembangunan Malaysia loan (RM2.4bil); processing fee for a deferred payment scheme (RM10mil) and legal/other fees (RM1mil).

- The AG’s report also added that a sum of RM6.7bil under a deferred payment scheme was required – as the project’s cost had exceeded its allocations under both the 9^th (RM2.4bil) and 10^th  Malaysia Plans (RM8.2mil).

- That said, we do not expect any significant impact  on Gamuda following the AG’s latest review of the IpohPadang Besar EDT project. The project’s original cost is about RM12.5bil (Gamuda’s 50% share: ~RM6.2bil)

- Firstly, our checks indicate that the additional RM3.6bil lay outside the scope of works of the MMC-Gamuda JV – the turnkey contractor for the project.

- Secondly and more importantly, the federal government had previously granted the MMC-Gamuda JV with two extension of time (EOT) ranging between 17 and 22 months due to delays in land acquisitions.

- Our existing assumptions for the project to (~85% completed) be delivered by end-2014, therefore, stays. It is also in-line with the targeted completion date of November 7, 2014 as per the AG’s report.

- Thirdly, Gamuda had already provided for an estimated RM600mil in Variation Orders (VOs) into its budget. Hence, the risk of further provisions is minimal at this juncture (See report dated 28 September 2012: Record FY12 profits, now what’s next?).

- Management would likely commence negotiations with the government early next year on the project’s loss & expense accounts and ~RM600mil VO claim. Out of this total, a bulk of the claims is related to track/system works by sub-contractors.     

Source: AmeSecurities