Gamuda Bhd (Dec 12, RM3.13)
Downgrade to market perform with fair value RM3.02 from RM3.41: We expect Gamuda 1QFY12 results to meet our expectations but miss the market consensus.
At RM100 to RM105 million, 1QFY12 core net profit will have declined by 17% to 21% against RM126.2 million recorded in 4QFY11 ended July largely due to: (i) the high base in 4QFY11 due to the writeback of overprovisioning of scheduled highway maintenance expenses in India; (ii) continued easing in property profits; and (iii) slightly reduced construction margins.
Nonetheless, on a year-on-year (y-o-y) basis, 1QFY12 net profit will still have grown by 13% to 19%, underpinned largely by firmer construction margins on the back of the more stable input costs, as well as stronger property profits.
We maintain our forecasts. Risks to our view inlcude: (i) the delay or cancellation of the Klang Valley MRT project; (ii) Gamuda getting a smaller role in the MRT project; and (iii) rising input costs.
We have turned less enthusiastic on construction stocks as we believe their share price performance is likely to be muted over the next three to six months as it has become increasingly clear that: (i) it is easier said than done when it comes to the actual rollout of new large-scale projects; (ii) realistically, earnings impact from the Klang Valley MRT may be quarters, or even a year or two away, given the inevitable bureaucratic hurdles; and (iii) there is a lack of credible new large-scale projects in the pipeline.
Indicative fair value for Gamuda is reduced by 11% to RM3.02 from RM3.41 based on sum-of-parts, valuing its construction business at 12 times one-year forward earnings (from 14 times previously), in line with the downgrade in our one-year forward target price earnings ratio for the construction sector to eight to 12 times (from 10 to 14 times previously). — RHB Research, Dec 12
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