Gamuda: Solid quarter, bright spots ahead (March 25, 2011)

Solid quarter, bright spots ahead

• 1HFY11 net profit was within our expectation but beat street estimates; expect stronger 2H

• Tunneling tender out by 4Q, Vietnam turning around

• BUY for 39% upside to SOP-derived TP of RM5.25

Expect stronger 2H. 2QFY11 net profit of RM94m (+6% qoq, +20% yoy) takes 1HFY11 net profit to RM183m. Sequential growth was driven by 9% and 36% growth in construction and property EBIT to RM34m and RM38m, respectively. Construction EBIT margin continued to improve in 2QFY11 to 8.3% from 6.6% the quarter before, largely led by its double tracking project (58% completed). 1HFY11 property sales were robust at RM600m with possible revision to the RM1bn target next quarter.

3 key takeways: (i) The double tracking project has received a second EOT to 2014. This can be viewed positively as it removes LAD risk and gives the JV grounds for compensation. But earnings impact is expected to be minimal as the bulk of higher-margin civil works will be completed by end-2012, and remaining works till 2014 would be system and electrification works that will be outsourced. (ii) Prequalification has been called for the nontunneling portion of the MRT with ground-breaking still slated for July. Tunneling tenders are scheduled to be out in 4Q CY11. (iii) Both property projects in Vietnam have shown promising signs. Celadon City, scheduled for official launch by end-March, was soft launched recently with all 159 units (RM50-60m sales vs FY11 target of RM300m) registered. For Gamuda City, 20ha out of the 72ha for one parcel of land has been handed over. This will pave the way for an official launch by July 2011.

BUY, TP RM5.25. Gamuda remains on our high conviction list as the most leveraged proxy to the MRT. Its shared role with MMC as PDP puts it in good stead for the high-margin tunneling works. We valued this at RM2.00/share, after factored in 50% of the DCF value based on RM7bn worth of tunneling works and 8.3% blended margins.