GAMUDA : Maintain BUY at RM3.70 with higher FV RM4.28 (from RM3.82)

Next stop for Gamuda: KL MRT station?

Gamuda Bhd
(Sept 17, RM3.74)
Maintain buy at RM3.70 with higher fair value RM4.28 (from RM3.82): Our fair value on Gamuda Bhd (Gamuda) is raised from RM3.82 per share to RM4.28, based on an unchanged 5% discount to its revised sum-of-parts value, as we roll forward our valuation base to FY2011F.

Recent positive news flow has lent credence to our earlier conviction that the RM43 billion Klang Valley Mass Rapid Transit (MRT) has a high chance of taking off — given its huge socio-economic benefits.

This massive project was among a few projects specifically showcased during Pemandu’s Sept 15 briefing to analysts on the Economic Transformation Programme.

More concrete details are likely to be disclosed during Budget 2011 in October — with the expected completion of feasibility studies by independent consultants by end this month.
Gamuda has also submitted a bid for the Klang Valley Light Rail Transit (LRT) extension — Phase 1 (about RM2.3 billion) could be out by end-4Q2010.

We reckon the Gamuda-MMC JV is a strong contender for the MRT works because it is the originator of the MRT proposal, solidified by its rail-based and tunnelling expertise. This could potentially trigger a multiyear re-rating in Gamuda’s earnings.

On a base-case scenario, assuming that the Gamuda-MMC JV secures only the tunnelling package worth about RM12.9 billion at a net margin of 10%, the uplift to Gamuda’s FY2012F/13F earnings would be 9% to 14% (fair value: + 14% to RM4.86 per share).

Under a blue-sky scenario, where we assume the Gamuda-MMC JV would secure both the tunnelling package and project manager role at a blended net margin of 6.5%, Gamuda’s FY2012F/13F earnings would jump by 16% to 26% (fair value: +29% to RM5.54 per share).

Even before including any potential impact from the MRT project, we forecast FY2011F net profit to expand by 26% year-on-year to RM345 million (FY2010F: +41%).

This is backed by a robust three-year EPS CAGR of 27% and healthy order book of RM6.5 billion.

Restoration of construction margins should gain traction — rising to 6.7% to 9% for FY2011F/12F against 4% in FY2010F.

On the property front, Gamuda is targeting a near doubling of its pre-sales at RM1.7 billion for FY2011F (FY2010: about RM800 million) with nearly half coming from Vietnam.

Gamuda’s imminent inclusion into the FBM KLCI 30 Index on Sept 20 could provide further valuation support.

The stock’s foreign shareholding has increased circa 2% to 33% currently, from 31% prior to the initial announcement of the MRT project back in June. — AmResearch, Sept 17

This article appeared in The Edge Financial Daily, September 20, 2010.