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? No issue. 1HFY07/11 net profit came in at 47% of our full-year forecast and the full-year market consensus. However, we consider the results within expectations as we expect a stronger 2H on the back of continued improvement in construction margins as well as stronger property profits.
? Tender for MRT’s tunneling works in 4Q2011. Gamuda expects the Government to officially call for the tender for the tunneling works for the Sg Buloh – Kajang (SBK) line of the MRT project in 4Q2011. The award of contract is expected to happen in 1Q2012 with physical work only expected to be in full swing by mid-2013. This is fairly consistent with our view that as far as Gamuda is concerned, the meaningful contribution from the MRT project will still be quarters away.
? 2nd extension of time for DT. Gamuda formally announced that it had been granted by the Government a second extension of time for the completion of the Ipoh – Padang Besar double-tracking project (DT) to Nov 2014. It guided for “positive impact” from the second extension of time as it effectively: (1) Absolves Gamuda from liquidated and ascertained damages (LAD) arising from late delivery; and (2) Opens up opportunities for additional claims.
? Maiden property launches in Vietnam, finally. The soft launch of Celadon City in HCMC already happened two weeks ago and the official launch will go live as and when the foundation works are done by Apr 2011. The maiden launch of Gamuda City in Hanoi is expected in Jul 2011.
? Forecasts. Maintained.
? Risks to our view. These include: (1) New contracts secured in FY07/11-13 (excluding the MRT) to come in below our target of RM2bn per annum; (2) The RM40bn MRT project fails to get off the ground; and (3) Rising input costs.
? Maintain Market Perform. Over the immediate term, we are Neutral on the construction sector due to “news flow fatigue”. We suspect the market is already tired of the same old news flow from the same old projects such as the LRT extension, MRT, “River of Life”, etc. We believe the next round of re-rating will not take place until the market is more sure of the exact timing of the “first oil” from these key public infrastructure jobs. For the MRT project, we believe this could well be 4-6 quarters away given the still preliminary and tentative nature of various aspects of the project. Indicative fair value for Gamuda is RM4.03 based on “sum of parts”.
? No issue. 1HFY07/11 net profit came in at 47% of our full-year forecast and the full-year market consensus. However, we consider the results within expectations as we expect a stronger 2H on the back of continued improvement in construction margins as well as stronger property profits. Gamuda guided for a stronger 2H visa-vis 1H for the same reasons.
? Tender for MRT’s tunneling works in 4Q2011. Gamuda expects the Government to officially call for the tender for the tunneling works for the Sg Buloh – Kajang (SBK) line of the MRT project in 4Q2011. The award of contract is expected to happen in 1Q2012 with physical work only expected to be in full swing by mid-2013. This is fairly consistent with our view that as far as Gamuda is concerned, the meaningful contribution from the MRT project will still be quarters away. Recall, the award of the tunneling package is tricky as conflict of interest arises given that MMC-Gamuda JV is keen to bid as contractor while it is also the project delivery partner (PDP) that has the responsibility to award the contract to the lowest bidder. To ensure transparency, Gamuda has proposed a “Swiss challenge” that goes by the following steps: (1) To call for international bids for the tunneling contract; and (2) MMC-Gamuda JV to match the lowest international bid or the job will go to the lowest international bidder. We believe the shortcoming of this contract award basis (in the sense that it may not be truly competitive) is that it may not attract as many international bids due to the caveat that there is a “previlleged” bidder, i.e MMC-Gamuda JV, that has the rights to match the lowest bidder and walk away with the contract.
? 2nd extension of time for DT. Gamuda formally announced that it had been granted by the Government a second extension of time for the completion of the Ipoh – Padang Besar double-tracking project (DT) to Nov 2014 now, as compared with Dec 2013 after the first extension of time and Jan 2013 originally. This means that the job now spans over seven years, as compared with six years after the first extension and five years originally. The reason for the second extension of time was the same as the first one, i.e. the delay in land acquisition that was primarily the Government’s responsibility. Gamuda guided for “positive impact” from the second extension of time as it effectively: (1) Absolves Gamuda from liquidated and ascertained damages (LAD) arising from late delivery; and (2) Opens up opportunities for additional claims. The second extension of time will not have material impact on profit recognition from the project as the extended period covers largely system and electrification works that Gamuda only makes a thin procurement margin.
? Last round of delays for maiden property launches in Vietnam. The maiden launch of Celadon City (previously known as Tan Thang) in HCMC is now expected in Apr 2011, vis-à-vis Feb 2011 Gamuda guided three months ago. This time around, there will not be further delay again as the soft launch already happened two weeks ago and the official launch will go live as and when the foundation works are done by Apr 2011. Already, Gamuda has managed to clock up bookings for 159 units of apartments priced at US$70k-130k per unit, translating to US$970-1,350 per sq m that is at a 10-15% premium to the market. Celadon City is able to command a premium pricing despite the oversupply of apartments in HCMC at present largely due to product differenciation with a 10-acre park within the development. Meanwhile, the maiden launch of Gamuda City (previously known as Yenso Park) in Hanoi has been delayed to Jul 2011 (from Apr 2011 guided three months ago). Similarly, there will not be further delay again as the transfer of land titles that held back the maiden launch has finally started to happen in stages. Gamuda kept its guidance on projected sales of RM300m from Celadon City in HCMC in FY07/11, but cut projected sales from Gamuda City in Hanoi in FY07/11 to zero from RM400m previously. We continue not to reflect in our numbers any earnings contributions from both the property projects in Vietnam as they are unlikely to be significant during our forecast period.
? Strong property sales in Malaysia. Gamuda maintained its FY07/11 local property sales target of RM1bn. In 1HFY07/11, it already managed to clock up RM600m sales. At present, Gamuda’s unbilled property sales stand at RM840m. In our earnings forecasts, we assume turnover and EBIT of RM650m and RM110.5m per annum from Gamuda’s local property division in FY07/11-13.
? Forecasts. Maintained.
? Risks to our view. These include: (1) New contracts secured in FY07/11-13 (excluding the MRT) to come in below our target of RM2bn per annum; (2) The RM40bn MRT project fails to get off the ground; and (3) Rising input costs.
? Maintain Market Perform. Over the immediate term, we expect the construction sector in general to only perform in line with the broarder market due to “news flow fatigue”. We suspect the market is already tired of the same old news flow from the same old projects such as the LRT extension, MRT, “River of Life” (clean-up of the Klang River) and those under the 10th Malaysia Plan (10MP). We believe, as it stands now, the market has very much gone past, if not substantially gone past, the “news flow” phase of the cycle for construction stocks. We believe the next round of re-rating will not take place until the market is more sure of the exact timing of the “first oil” or maiden earnings contributions from these key public infrastructure jobs. For the MRT project, we believe this could well be 4-6 quarters away given the still preliminary and tentative nature of various aspects of the project such as alignment, funding (including the still undefined “rail-plus-property” model and how to entice the private sector to partially help funding the project), commencement of compulsory acquisition of private properties, enactment of new laws governing the land use rights underground, integration with the masterplan of the Rubber Research Institute development in Sungai Buloh, etc. Indicative fair value for Gamuda is RM4.03 based on “sum of parts” (see Table 5).
