Gamuda's 9-month results to meet expectations

Gamuda Bhd (June 16, RM3.72)
Maintain market perform at RM3.73 with fair value of RM4.03:
We expect Gamuda's 3QFY11 results, due out by the end of next week, to come in within expectations. We expect Gamuda's 3QFY11 core net profit to come in at RM90 million to RM95 million, flattish vis-à-vis RM94 million recorded in 2QFY11 on sustained construction margins sequentially, taking the cue from the sequentially at best only stable/more normalised construction margins achieved by peers IJM and WCT in their just-released January-March 2011 results.

Over the last three months, IJM's construction profit before tax (PBT) margin eased slightly from 5.3% to 4.9% (excluding RM124 million one-off provisions), while WCT's construction earnings before interest and tax (Ebit) margin (adjusted for inter-company elimination) declined from 23.1% to 15.9% on reduced writebacks of over-provisions from certain completed overseas jobs.

Cumulatively, Gamuda's net profit of RM273 million to RM278 million is only equivalent to 70%-72% of our full-year forecast and the full-year market consensus. A bumper 4Q on the back of accelerated construction activities and hence billings should see Gamuda meeting the full-year expectations. At RM273 million to RM278 million, net profit in 9MFY11 will have grown 34%-36% year-on-year, in line with our full-year growth forecast of 37%, premised upon firmer construction margins under a more stable input cost environment. Forecasts maintained.

Risks to our view include: (1) New contracts secured in FY11-FY13 (excluding the MRT) to come in below our target of RM2 billion per annum; (2) The RM40 billion MRT project fails to get off the ground; and (3) Rising input costs.

Over the immediate term, we expect construction stocks in general to only perform in line with the broader market due to "news flow fatigue". We suspect the market is already tired of the same news flow from the same projects such as the LRT extension, MRT, "River of Life" (clean-up of the Klang River) and other infrastructure jobs proposed under the Economic Transformation  Programme.

We believe the next round of re-rating will not take place until the market is more sure of the exact timing of the "first oil" or maiden earnings contributions from these key public infrastructure jobs, particularly, the MRT project. Indicative fair value for Gamuda is RM4.03 based on "sum of parts". — RHB Research, June 16

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