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PN may not proceed with takeover of Gamuda's four highways, says Affin Hwang

KUALA LUMPUR (June 25): The Perikatan Nasional (PN) government may not proceed with the takeover of four toll highways which Gamuda Bhd has a majority stake in — Damansara-Puchong Expressway, SPRINT Expressway, Shah Alam Expressway, and SMART Tunnel — according to Affin Hwang Capital Research.

Instead, the new government may be more supportive of public-private partnership projects for infrastructure development, it added.

"We believe the new government is unlikely to proceed with the acquisition of Gamuda's toll highway stakes for RM2.36 billion, given the financial constraints as the federal government deficit is set to rise due to the economic stimulus measures.

"We gather that Gamuda has engaged the government to provide industry feedback on reviving mega infrastructure projects such as the MRT3 project to pump-prime the economy," Affin Hwang Capital Research senior associate director of equity research Loong Chee Wei wrote in his note today.

The government's proposal to take over the four highways was first mooted by the previous Pakatan Harapan government in June last year. At the time, former finance minister Lim Guan Eng said the proposed acquisition would be funded by a bond issuance fully financed and paid for from the collection of congestion charges.

Then in October, in his Budget 2020 speech, Guan Eng said the Cabinet had approved the takeover of the four highways.

Meanwhile, Loong also said that due to the change in federal government, there are uncertainties on whether the new government will continue to guarantee the bonds to be issued by the Penang state government to finance the Bayan Lepas LRT component.

The LRT project is part of Penang's multibillion-ringgit Transport Master Plan, which Gamuda has been appointed the Project Delivery Partner (PDP).

"The Gamuda-led SRS Consortium expects to sign the Project Delivery Partner agreement for the Penang Transport Master Plan with the state government in 3Q20 (third quarter of 2020) (delayed from 2Q20).

"But the SRS Consortium will likely proceed with the RM8 billion Penang South Reclamation for Island A in 1H21 (first half of 2021) once the PDP agreement is signed," Loong said.

Loong pointed out that Gamuda's net profit for the cumulative first nine months ended April 30,2020 (9MFY20) came in below market's and the research firm's expectations, after the company was negatively impacted by the government-imposed Movement Control Order (MCO).

However, Loong believes that the worst is over for Gamuda as it resumed operations in early May and hence, its earnings are expected to recover in the fourth financial quarter.

As such, Affin Hwang has maintained its "hold" call on Gamuda at RM3.53 with an unchanged target price of RM3.75.

Yesterday, Gamuda announced that its net profit for its third financial quarter ended April 30, 2020 (3QFY20) slumped 77.14% to RM40.23 million from RM175.99 million a year earlier, as its Malaysian operations were affected by the MCO imposed during the final six weeks of the quarter.

Gamuda said the MCO caused work stoppages and reduced traffic volume across its four expressways, as a result the group recorded its lowest quarterly revenue since 1QFY17.

Following this, the group decided that no dividend will be paid for the quarter. It paid out a dividend of six sen per share for 1QFY20 and has consistently paid 12 sen dividend for every financial year since FY09.

Gamuda's revenue for 3QFY20 fell 46.96% to RM549.9 million from RM1.04 billion in the year-ago quarter.

The dismal quarterly performance dragged Gamuda's net profit for 9MFY20 down 25.36% to RM389.02 million from RM521.17 million in the previous corresponding period.

Similarly, cumulative revenue fell 10.74% to RM2.74 billion from RM3.07 billion.

As at 11am, shares in Gamuda were trading down five sen or 1.42% at RM3.48 after 165,600 shares were traded.

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