Gamuda Bhd (March 10, RM4.65)

Maintain buy with a higher target price (TP) of RM5.65: We visited Gamuda Bhd’s property projects in Ho Chi Minh City (HCMC) and Hanoi. Property sales in Vietnam rose to RM530 million in its financial year 2015 (FY15) from RM70 million in FY14. Gamuda expects robust property sales of RM500 million to RM520 million in Vietnam, and new overseas ventures in Melbourne and Singapore, to drive overall sales growth from FY16 to FY17. Land sales in Vietnam would likely boost earnings. Gamuda is one of our sector’s and country’s top buys. Our revalued net asset value (RNAV)-based TP is raised to RM5.65.

After facing various challenges in Vietnam over the past two years, Gamuda saw a strong rebound in property sales to RM530 million in FY15. Some of the challenges faced included: i) paying compensation to farmers for its Gamuda City land acquisition in Hanoi, ii) weak property market conditions; and iii) disagreements with local partner Sacomreal on a property launch strategy for the Celadon City project in HCMC.

The Hanoi government was to grant Gamuda land use rights for 255ha as compensation for building Yen So Park and sewerage plants for about US$250 million (RM1.03 billion). The estimated gross development value (GDV) for Gamuda City is RM10.4 billion. The project contributed 85% of Vietnam sales in FY15.

Gamuda bought out local partner Sacomreal’s 40% stake in the joint venture to develop the 82ha Celadon City project for US$66.5 million in July 2015. The reason was a disagreement over the development concept between the two partners. Subsequently, Gamuda embarked on a more aggressive development strategy for the RM5.2 billion GDV project. It is negotiating to sell another 3.5ha land parcel to Aeon to expand the latter’s mall in the area. We expect Gamuda to see a land sale gain.

The outlook for Gamuda’s Vietnam projects has improved on recovery in the property market and upgrades in road infrastructure.

The Malaysian operations remain the key earnings driver, but we think Gamuda’s Vietnam operation provides geographical diversification and long-term expansion opportunities in the fast-growing economy. We raise our 12-month RNAV-based TP to RM5.65 from RM5.59 to reflect the removal of the minority interest in its Gamuda City project. Maintain “buy”. — Affin Hwang Investment Bank Bhd, March 9

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This article first appeared in The Edge Financial Daily, on March 11, 2016. Subscribe to The Edge Financial Daily here.

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