Gamuda - Definitely another good year ahead

Gamuda is our Top Pick for the construction sector for 1Q13 due to its fundamentally strong financials and visible earnings outlook in weathering the upcoming general election uncertainties. With a sizeable order book of RM3.8b, Gamuda’s earnings visibility is clear for at least another three years. At the same time, we believe that Gamuda will be in the limelight due to its Litrak divestment plan coupled with the possible tender for the MRT 2 line project. Its recent 1Q13 results have marked a positive milestone for another round of record-breaking earnings in FY13. It’s too cheap to ignore Gamuda at this juncture, which is trading at only 12x FY12 PER (below the mean of 15x) and comes with a decent dividend yield of 3% for a construction company. We are reiterating our OUTPERFORM recommendation and our Target Price at RM4.29 based on 15x FY13 PER.               

 

Strong start for FY13. The company’s recent 1Q13 results came in within our expectations, which indicate that the company should continue to see good earnings growth for the next few quarters to come. This is due to positive progress of its ongoing MRT contract job (tunneling and elevated works). The peak of the MRT contract earnings recognition will be felt from 2H2013 onwards as the TBM machine starts the tunneling works. We have tweaked our earnings forecasts to account for a more favourable margin from its construction activities as well as a higher recognition of construction revenue in the overall group earnings.   

MRT 2 line progress.  The prequalification bids will only be called up by end of 2013. However, the government’s decision and the news on the appointment of the PDP will come in by middle of 2013. We think that this will be a crucial period for the government, especially since the election is likely to take place somewhere by end-1Q13 or early 2Q13 to smoothen the progress of the MRT project as a whole. Gamuda, through its JV with MMC, stands a good chance to win the MRT Line 2 project  due to its available capacity (10 TBMs) to execute the project. Recall that the MRT Line 2 alignment will be mainly underground.       

EDTP Gemas-Johor Bahru project. Based on recent reported news, the government will decide on the High Speed Railway (HSR) project and EDTP Gemas-Johor Bahru project by 1Q13. This is positive to Gamuda as management guided that it is likely to bid for the project together with its China partner, i.e. China Railway Construction Corp (CRCC). The contract could be worth c. RM7.0b to RM8.0b. 

Risks. Despite the positive construction earnings outlook, we note that the group’s property development (high rise property) project in Ho Chi Minh City (HCMC) poses a risk of unsold units as the management has adopted a Build-and-Sell approach to gain purchasers’ confidence in the development. To recap, Gamuda sold  a parcel of land in HCMC to  Aeon Credit to be developed as a shopping complex (AEON) and the construction is expected to be completed by 2Q2013. This is expected to spur demand for properties in the area. Other than Vietnam, its Malaysia property projects, i.e. Horizon Hills and Jade Hills are still expected to see positive sales for the next two to three years.      

We have an OUTPERFORM recommendation on Gamuda with a Target Price of RM4.29 based on 15x FY13 PER. Gamuda is trading at an undemanding valuation of 12x FY13 currently, which is below the mean of 15.0x. It also offers a decent divided yield of 3%  for a construction company.   

Source: Kenanga