Gamuda’s share price rebounding after sharp plunge

Gamuda Bhd 
(Dec 21, RM4.41)
Upgrade to buy with a higher target price (TP) of RM5.11: Tollways earnings are seen to provide sustainable source of earnings growth to Gamuda. We reckon that the performance of concession assets — local tollways — is sustainable to allay the concern regarding its construction earnings prospect and order book (from RM1 billion to RM820 million). 

Despite estimated lower revenue, Gamuda’s local intra-urban tollways — Lingkaran Trans Kota Holdings Bhd (Litrak), Stormwater Management and Road Tunnel or better known as Smart Tunnel, Shah Alam Expressway (Kesas) and Lebuhraya Damansara-Puchong (LDP) —  have recorded a contribution of about 16.6% of revenue. Its tollways have recorded an average 10.4% increase in annual revenue and a 3% increase in tollable traffic.

Malaysian Automobile Association (MAA) has projected that 55,000 new cars are added to Malaysian roads every month and the number of cars in the Klang Valley is expected to increase to seven million by 2020.

Recall that Gamuda’s local tollway assets provide intra-urban access around the Klang Valley with a conservative daily average traffic volume of 378,000. The numbers provide a healthy glimpse of the segment’s potential to contribute to Gamuda’s earnings even though total revenue could slip in weaker times. 

We raise our financial year 2016 forecast (FY16F) earnings by 5% to RM746.4 million and FY17 forecast by 20% to RM887 million to reflect a higher contribution from concession assets which contributed 42% to operating income on the back of about a 25% margin; and non-ringgit revenue contribution from Toa Payoh development in Singapore which entails a gross development value of S$650 million (RM1.98 billion) and is scheduled to be launched in the second quarter of 2016 (2Q16). 

Assuming a net margin of 11% and Singapore dollar/ringgit rate at 2.9, the project is poised to contribute RM214.5 million to Gamuda’s earnings over the next three years.

As we have only imputed Klang Valley mass rapid transit 2 (KVMRT2) projects into our earnings estimates, any project wins from the Klang Valley light rail transit Line 3 (KVLRT3) in late 3Q16 would provide additional upside. 

Under the LRT3 work packages there are 24 elevated stations and one underground station. The LRT3 project is worth RM9 billion while the tunnelling and the underground station at Persiaran Kayangan Hisamuddin in Shah Alam are projected to cost at least RM700 million in which Gamuda could participate.

Its balance sheet is capable of weathering the impact of downturns such as gaps between project completion and commencement; and depleting construction backlog.

After reporting RM1.4 billion in total cash and short deposits with another RM3.7 billion in receivables and inventories, it is well equipped to cover its total financial obligations by 0.76 times. Furthermore, 94% of its book value is tangible thus insulating Gamuda from any financial shocks.

Besides that, Gamuda’s competitive advantage is demonstrated by steady profitability ratios. Over the last five years its return on equity (ROE) averaged at 14.6%. Gamuda has returned 11% ROE during the most recent trailing 12 months (TTM) period compared with its peers’ average TTM ROE of 8.4%. 

Gamuda’s five-year track record notably exhibits a consistent ability to produce high levels of profit relative to shareholders equity.

Furthermore, Gamuda led the pack by delivering a solid five-year average net margin of 20% compared with five-year peers’ average of only 9%. The above average margin arguably demonstrates its unique ability to deliver on specialised engineering works, especially in infrastructure construction, hence fending off competitors looking to capture a portion of its market share.

We upgrade our recommendation to “buy” from “neutral” and revise up our TP to RM5.11 (from RM4.45) based on FY16 sum-of-parts valuation. The upgrade is also to reflect the recent changes in Litrak’s valuation — MIDF Research current TP raised to RM5.34 from RM4.56 per share previously. 

It is notable that its share price is rebounding after the recent sharp plunge, which was due to unfair perception of its order book depletion and concern over lower earnings in FY16.


This article first appeared in The Edge Financial Daily, on December 22, 2015. Tap here to subscribe for your personal copy.