Gamuda Bhd (June 4, RM5)

Upgrade to buy with higher target price (TP) of RM5.65: We gather that Gamuda Bhd is one of two shortlisted bidders for the Penang Integrated Transport Master Plan project out of the six initial bidders, based on our market research.

We believe prospects are good for Gamuda to clinch the project delivery partner (PDP) contract given its strong track record in undertaking large-scale infrastructure projects.

Assuming RM12.4 billion share of works over financial year 2018 (FY18) to FY31, a 7% discount rate and 6% PDP fee rate, we estimate the project discounted cash flow value is 12 sen per share. This report marks a transfer of analyst coverage.

The joint venture between MMC Corp Bhd and Gamuda was appointed the PDP for the RM25 billion Mass Rapid Transit (MRT) Line 2 project in October 2014, and an agreement finalising the PDP terms is expected to be signed this month.

The outstanding construction order book of RM1.6 billion and PDP order book of RM12.2 billion should last until 2022.

Gamuda has cut its property presale target to RM1.2 billion from RM1.6 billion for FY15 (versus RM1.8 billion in FY14) as tight bank lending for mortgages and weak market sentiment have adversely affected property demand, especially in Johor.

We cut our earnings forecasts by 3% to 10% for FY15 and FY16 to reflect slower property pre-sales and the expected delay in the implementation of the MRT Line 2 project.

Gamuda is our preferred large-cap pick in the construction sector given the strong pipeline of large infrastructure projects and its good prospects to grow its construction order book.

We upgrade Gamuda to “buy” (from “hold”) with a new revised net asset valuation-based 12-month TP of RM5.65 (from RM5.07), which offers 16% return potential (including dividends).

Key risk would be slower property sales, leading to cuts to consensus FY16 earnings. — AffinHwang Capital

This article first appeared in The Edge Financial Daily, on June 5, 2015.

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