GAMUDA : BUY at RM3.60, FV of RM3.96

Gamuda’s 4QFY2010 results to meet expectations

Gamuda Bhd
(Sept 8, RM3.53)
Maintain trading buy at RM3.60 with revised fair value of RM3.96 (from RM3.85): Taking a cue from the firm construction margins recorded by peers IJM and WCT in their just-released April to June 2010 results, we expect Gamuda’s 4QFY2010 results, due out by the end of the month, to come in within expectations. We expect Gamuda’s 4Q core net profit to come in at RM75 million to RM85 million, vis-à-vis RM73 million recorded in 3QFY2010. Cumulatively, full-year net profit of RM279 million to RM289 million will be in line with our forecast of RM277 million and the market consensus of RM289 million.

At RM279 million to RM289 million, FY2010 net profit will have grown 44% to 49% year-on-year, driven largely by the recovery in construction margins that has been experienced by most players in the sector since the beginning of the year as cost pressure eases.
Over the last three months, IJM’s construction profit before tax (PBT) margin moved up from 3.1% to 3.8%, while WCT’s construction earnings before interest and tax (Ebit) margin (adjusted for intercompany elimination) normalised to 8%, from an exceptionally high 12% previously.

FY2010 forecast is maintained. However, FY2011-12 net profit forecasts are trimmed 1% to 4% to reflect the absence of any new contract in FY2010, vis-à-vis our assumption of RM1 billion.
Risks include: (i) The new contracts secured in FY2011-12 coming in below our target of RM2 billion per year; (ii) The RM36 billion KL MRT project fails to get off the ground; and (iii) Rising input costs.

Maintain “trading buy”. We are upbeat on the construction sector as we foresee construction stocks to generally outperform the market in 2H2010, buoyed by news flow, particularly, from: (i) The RM36 billion KL MRT project; (ii) The RM7 billion Ampang and Kelana Jaya LRT line extension project; and (iii) Federal land deals.

The KL MRT project is the brainchild of the Gamuda-MMC Corp JV, pending the greenlight from the government. Indicative fair value based on sum-of-parts is raised 3% from RM3.85 to RM3.96, having priced into the KL MRT contract a 5% price inflation per annum. — RHB Research Institute, Sept 8


This article appeared in The Edge Financial Daily, September 9, 2010.