Gamuda: Earnings uptrend intact (March 25, 2011)

Earnings uptrend intact

Above our expectations. 1HFY11 results included a RM16m positive accounting adjustment at SPLASH post-IC12 implementation, which was not reflected in our forecast. RM183m net profit (+20% YoY) made up 51% of our pre-revision RM355m full-year forecast. We raise our FY11-13 net profit forecasts by 8-9% p.a. to reflect this adjustment.

Being non-cash in nature, our DCF valuation for SPLASH is unchanged and this too, has no impact on our RM4.45 RNAV-based target price for Gamuda. The stock remains our top pick in construction. Maintain Buy.

Broad-based improvement. Excluding the positive RM16m, 1H net profit was RM167m, which was 47% of our previous FY11 forecast.

Sequential earnings uptrend continued into 2Q, with reported net profitup 6% QoQ on higher contributions from all divisions. Stronger construction earnings was due to margin expansion (+1.5 ppts QoQ to 7%) which offset slower works recognition (-14%), while property saw higher progress billings (+25%) coupled with strong margins (+1.8% ppt
to 19%). The expressways and water reported higher combined profits.

Expect a stronger 2H. Construction margin expansion in 2Q was due to the near completion of low margin Mid-East jobs, and rising proportion of the relatively higher margins double track rail and Yenso infrastructure. The uptrend is expected to continue into the next few quarters as work progress enters more matured phases.

Property development meanwhile reaped strong RM600m sales in 1HFY11, meeting 60% of the RM1b FY11 internal target. This would also result in stronger earnings in 2H – we project +12% HoH.

Revising forecasts for IC12. IC12 applies to SPLASH’s concession, now termed a “service” concession. For accounting purposes, the amount due to SPLASH from the sale of treated water will be treated as receivables, and the revenue recognition will be calculated using the effective interest method (instead of realisable basis). As a result, SPLASH’s revenue is higher for the current FY.

The outcome is a RM16m positive impact on Gamuda in 1HFY11. Our profit forecasts are adjusted for this change in accounting policy effective this FY.

Other highlights

2nd extension of time (EoT) for double track rail construction. The government has revised the project completion date from Jan 2013 to Nov 2014, due to further delay in land handover by the authorities.

This represents the 2nd EoT which has lengthened the construction period from 5 years originally (Dec 2012) to 7 years now (Nov 2014).

The land has been substantially handed over; we believe >95%. The EoT should positively remove liquidated ascertained damages (LAD) risks due to the delay in construction completion. It also opens up possibilities for compensation claims.

Double track margin to rise gradually. Construction margin over the entire work length should range 12%, as costs are better ascertainable with the works moving into the final phase in terms of civil construction (ending in end-2013 or early-2014) and thenafter, into the system and signalling phase. Works completion was 58% as at end-Jan 2011.

Steel costs have been locked in until end-2011 / early-2012, leaving just one more year (+/-) of cost exposure before the civil phase ends. Margin recognition in the past, we estimate, has been single digit. This implies that forward margin should gradually rise towards the midteens level for a time blended 12% for the entire construction works. Tender for Sg Buloh-Kajang MRT tunnelling works likely in 4Q11.

The works will be awarded by the government under the “swiss challenge” method with MMC-Gamuda JV allowed to bid for the works.

Based on an anticipated 4Q11 tender period, we expect an award only in 1Q12, the earliest, with the physical construction to start in early- 2013 after the tunnel boring machine is firmly installed underground.

The construction value is not ascertained yet, but we have estimated RM6b+ (our 10 Mar update note). We have yet to reflect the KL/KV MRT project in our earnings forecasts for Gamuda.

Property sales heading for another record year. 1HFY11 sales totalled RM600m for the domestic projects, with unbilled sales standing at RM840m as at end-Jan 2011. The RM1b internal sales target for FY11 is retained for now, with upward revision being very likely.

Meanwhile, pre-launch marketing at the Celadon City (Tan Thang) development at Ho Chi Minh City last weekend has received positive response with around USD16m bookings, we estimate. The total sales target for Celadon City is RM300m over the next few months of FY11.

The official launch for Celadon City is April while for Yenso, it is July.

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