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Gamuda Bhd (OSK Research Sept 29, 2010) trading buy; target price RM4.31

Gamuda

Key MRT Play


Gamuda’s FY10 earnings of RM281m (+45% y-o-y) were within our expectations. The stock’s key catalyst is the proposed MRT. Positive news flow such as the completion of the project’s feasibility study and Cabinet approval may surface this year. The company’s property sales momentum is expected to be fuelled by its Vietnam launches. Maintain TRADING BUY on Gamuda with a higher TP of RM4.31 as the company is the key play for the MRT.

Finishing in line. Gamuda’s 4QFY10 revenue came in at RM714.8m (-24.1% y-o-y, +40% q-o-q) while earnings stood at RM76.6m (+77% y-o-y, +4.9% q-o-q). For the full year FY10, earnings amounted to RM280.7m, up 44.9% y-o-y. Margins for the same period expanded, with EBIT and net figures at 10.6% and 11.4% respectively (FY09 comparatives at 6.7% and 7.1%). All in, the earnings were within our estimates at -3.8% and consensus at -3.4%.

Good progress on current projects. Gamuda’s orderbook now totals RM6bn (RM4.2bn excluding the Nam Theun 1. The Double Track project has reached 49% completion, with > 95% of the required land handed over. Progress at Yenso Park has hit 50%, with the parks and lake clean-up almost completed. Construction PBT margins continued to recover at 5.7% vs the low of 1.2% witnessed in 2QFY09. Management is guiding for margins to expand further to 8-9% by end-FY11.

MRT tops the list. We gather that the MRT is at the top of projects earmarked for implementation under the recently unveiled Economic Transformation Programme. Public transport usage and rail investment in Greater KL is relatively low compared to that in developed nations. The proposal to remove fuel subsidies would also make it easier to push through with the MRT in place. Gamuda is the clear beneficiary of the MRT given its experience with SMART and the Kaohsiung MRT. We have imputed the NPV of profits into our valuation by assuming that the Gamuda-MMC JV secures the tunnelling portion (RM14bn).

Bidding for Dukhan Highway in Qatar. We gather that the Gamuda-WCT JV has submitted its bid for the Dukhan Highway 2 (RM1.5bn). Tenders closed recently and the outcome is expected to be out by year-end. Five parties are bidding for the said job. We feel that the JV has a decent chance of winning given its past experience with Phase 1.

Vietnam to boost sales. Property sales for FY10 stood at a record high of RM820m (+60%), with unbilled sales at RM560m. Gamuda is targeting RM1.58bn worth of sales in FY11, with growth to be driven by its Vietnam developments. While launches for Yenso will be delayed to 2QFY11, Tan Thang will be ready for launch by end-Oct. Should Vietnam meet its RM700m sales target, this will be the basis of an upside in our forecasts.

VALUATION & RECOMMENDATION

TRADING BUY, RM4.31 TP for more positive news flow. As the results were within our expectations, we retain our FY11-12 projections. However, given the current euphoria surrounding the proposed MRT, we are raising our construction earnings multiplier from 16x to 18x. At our revised SOP-based TP of RM4.31, Gamuda would be trading at 21.9x FY11 earnings. This is in line with its historical 1-year forward PER average of 22x. We expect more positive news flow from the MRT to surface in the coming months, including (i) completion of the feasibility study, and (ii) Cabinet approval of the project. In our view, the stock’s valuation multiples could be extended further when this occurs. For example, a year before the Double Track project was awarded, Gamuda was trading at an average forward PER multiple of 27.1x.

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