Gamuda Bhd (Dec 18, RM4.83)
Maintain buy with a lower target price of RM5.95: Gamuda Bhd posted results for its first quarter ended Oct 31, 2017 (1QFY18) with revenue coming in at RM771.8 million (-24% quarter-on-quarter [q-o-q], +53% year-on-year [y-o-y]) and core earnings of RM203 million (+98% q-o-q, +25% y-o-y). Gamuda’s 1QFY18 core earnings made up 26% of our and consensus FY17 forecasts, which were within expectations.
The mass rapid transit Line 2 (MRT2) (RM32 billion) is progressing well with 97% of the work packages already awarded. Overall progress on the project delivery partner (PDP) scope is at 13.3% while the underground work is 19.5%-complete. The first tunnel boring machine has been delivered to site and the first tunnel drive is expected to be launched in February 2018.
While aborting the PDP model for MRT3 may be a slight setback for Gamuda, we reckon that not all is lost. As about 80% of its alignment will be underground, the PDP scope would have been limited to begin with as it applies only for the elevated portion. Management has shared that MRT3 will have a mandated local content requirement in the range of 40% to 50%. We believe that Gamuda has a participating chance in the underground work via subcontracts given cost advantage as its existing 12 tunnel boring machines for MRT2 can be redeployed for MRT3; it has experience with the MRT1 and MRT2; and it has done extensive soil condition research.
Last month, Gamuda announced that it would form a 50:50 joint venture (JV) with Malaysian Resources Corp Bhd (MRCB) to bid for the high-speed rail’s (HSR) PDP role. The PDP will be in charge of the civil and infrastructure work (ex systems and rolling stock) for the Malaysian stretch of the HSR, estimated to be worth RM35 billion to RM40 billion. Contenders for the PDP role must be led by locals. We reckon that the JV is in a strong position to win the role as both parties are two of the few contractors with PDP experience (MRT1 and MRT2 for Gamuda and light rail transit [LRT] 3 for MRCB). Rail track record-wise, Gamuda has MRT1 and MRT2, Northern Double Track and Kaohsiung MRT while MRCB has LRT Ampang and MRT2 elevated viaduct. Tender for the HSR PDP will be closed end-January with a possible award by mid-2018.
Gamuda’s earnings upcycle is poised to hit another round of multi-year high in FY18 and FY19. It is also a key play to ride on the upcoming mega rail projects such as the HSR, East Coast Rail Line, and MRT3. — HLIB Research, Dec 18
This article first appeared in The Edge Financial Daily, on Dec 19, 2017.