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Gamuda gearing up for the big one in MRT project

Gamuda Bhd (Aug 9, RM3.34)
Recommend buy at RM3.20 with revised target price of RM5.10 (from RM5.25):
Prequalification for tunnelling works closed in early July 2011 with 12 parties — two Chinese contractors, one from the Middle East, and the rest from Asia.

We remain confident the project delivery partner (PDP) will clinch the RM8 billion tunnelling works for the blue line, premised on: (i) first-mover advantage, the mass rapid transit (MRT) project was conceptualised by the PDP over a year ago; (ii) understanding local soil conditions helps in costing; and (iii) established relationships with subcontractors and raw material suppliers.

And the Swiss Challenge tendering process gives it the right to outbid the lowest bidder.

For the remaining two lines — MRT 2 and MRT 3 — we believe the bulk of work ending in 2020 (phase 2 ends in 2030) will be tunnelling works worth circa RM12 billion.

Gamuda's maiden foray in Vietnam saw a slow start with only 50 out of 250 units in phase 1 of Celadon City in Ho Chi Minh City booked. Gamuda City — to be soft launched in October 2011 — may fare better given stronger demand for landed homes and a less competitive Hanoi market.

To be conservative, we cut FY12F/FY13F earnings by 4% to 8% after imputing more modest sales from Vietnam of RM700 million to RM1 billion (against RM1.2 billion to RM1.7 billion previously) and Gamuda's guidance of RM1.5 billion to RM2.1 billion (likely toned down by the next briefing).

We have a "buy" call on the stock but our target price is cut to RM5.10 after using a higher discount rate for its Vietnam projects (discounted cash flow valuation). We now expect Vietnam to form 41 sen per share of our sum-of-parts value (54 sen previously).

Valuations at 15 times FY12 earnings per share and 1.7 times net tangible assets are inexpensive (mean levels) against its peaks in 2008 of 38 times and 4.7 times (more than +2SD), when MMC-Gamuda clinched the RM12.5 billion double-tracking rail project due to a more efficient cost structure than the Indian and Chinese contractors.

Given low expectations, any additional positive news flow will re-rate the stock. — HwangDBS Vickers Research, Aug 9

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