Analysts turn bullish on Gamuda

KUALA LUMPUR: Analysts from various research houses have turned bullish on Gamuda Bhd. This follows a recent meeting with group managing director and CEO  Datuk Lin Yun Ling and other members of management.

According to research reports, discussions with Gamuda’s management were centred on the alignment of the MRT2 (mass rapid transit) line, the group’s plans to tender for the high-speed rail (HSR) project, the southern electric double tracking (EDT) project, and the Langat 2 water treatment plant (WTP).

CIMB Research wrote in a report yesterday that Cabinet approval for MRT2 is expected by July and this will take 1½ to two years before works can start.

“The July 2013 timeline for Cabinet approval of the MRT SSP (Sungai Buloh-Serdang-Putrajaya) line was a positive surprise, as we had expected it to be in the fourth quarter (4Q) of 2013. We are upbeat that Gamuda is positioning to tender for the HSR project and is looking to firm up a joint venture (JV) partner. But we believe that medium-term job wins will come from the potential award of the Gemas-Johor Baru (JB) double tracking and Langat 2 WTP,” said the research outfit.

MRT2 line will be built in two phases. The first phase spans from Sungai Buloh to Serdang and the second phase covers Serdang to Putrajaya (Precinct 14). Based on MRT1’s price tag, the 56km MRT2 should cost around RM25 billion, said CIMB.

According to analysts, Gamuda’s management said the government has yet to decide on the Gemas-JB EDT project.

“The EDT tracks maybe redundant if the HSR is in place, which can be the case since the southern rail tracks can be upgraded to HSR. Nonetheless, since the HSR will take a while to materialise [with the feasibility study still ongoing], we believe the government will build the Gemas-JB EDT first as the latter project has already been finalised and approved,” said Kenanga Research in a note yesterday.

On potential divestments, talks are still ongoing on the sale of Gamuda’s highway assets, according to analysts. Gamuda owns a 56% stake in Lingkaran Trans Kota Holdings Bhd (Litrak) which owns the LDP highway, 50% of the Smart tunnel concession, and a 30% direct stake each in the Sprint and Kesas highways.

“Management is also confident that the latest offer from the Selangor government to take over all water assets including Gamuda’s 40% owned Splash for RM1.8 billion (36 sen per share) will likely go through. It added that the proceeds of the assets sale could be distributed among shareholders and utilised for landbanking activities,” said Kenanga.

According to HLIB Research, Gamuda is on the lookout to replenish its landbank in the Klang Valley and Iskandar region. The company has earmarked about RM1 billion annually over the next three years to grow its landbank.

Hwang DBS Vickers Research said the rail and water treatment plant projects would triple Gamuda’s order book, now at RM4.2 billion.

“The biggest overhang for Gamuda had been the general election. With the ruling coalition given a fresh mandate, Gamuda should benefit the most among the contractors as most of its projects are government linked,” said the research firm.

HwangDBS Vickers Research has reduced Gamuda’s headline forecast 2013 financial year net profit by 26% after including the RM119 million in legal compensation to be booked in the third quarter. This involved an arbitration case between Gamuda and Wayss & Freytag on the Smart tunnel and a project in Qatar jointly executed with WCT Bhd.

The positive developments have prompted analysts to raise their target price on the construction group. HLIB Research has raised its target price on Gamuda to RM4.42, while maintaining its “hold” rating. HwangDBS Research has revised its target price upward to RM5.40 while retaining its “buy” rating. CIMB has advised investors to accumulate the stock, with a target price of RM5.60.

“News flow on MRT2 is now expected to pick up sooner. Expectations will rise on the group’s potential exposure to the next PDP (project delivery partner) structure and underground works,” said CIMB. Gamuda saw a spike in its share price this month, but closed three sen lower yesterday at RM4.70 with 18.9 million shares done.

This article first appeared in The Edge Financial Daily, on May 15, 2013.

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