Gamuda Bhd (June 11, RM3.45)
Maintain market perform with fair value RM3.78: We expect Gamuda's 9MFY12 core net profit to come in at RM355 million to RM365 million, which will meet our forecast but trail market expectations.
At RM355 million to RM365 million, 9M core net profit will have grown 19% to 22% y-o-y, underpinned largely by: (i) stronger construction profit on improved margins driven by more stable input costs; and (ii) stronger property profits underpinned by recorded property sales over the last one to two years on the back of a property upcycle.
We do not expect Gamuda's 3Q construction margins to substantially deviate from the normalised level of 10% to 15% at the earnings before interest and tax (Ebit) level, taking a cue from the continued normalisation in margins of peer IJM Land Bhd in its just released January to March 2012 results, thanks to the comparatively stable input cost environment.
We maintain our forecasts. Risks to our view include: (i) The Klang Valley MRT project being delayed or scrapped; (ii) Gamuda getting a smaller role in the Klang Valley MRT project; and (iii) rising input costs.
We are less enthusiastic on construction stocks as we believe their share price performance is likely to be capped over the next 6 to 12 months as the market begins to price in a higher risk premium for construction stocks ahead of the general election that will have to be held by March 2013.
Indicative sum-of-parts fair value for Gamuda is RM3.78, valuing its construction business at 14 times 1-year forward earnings, in line with our 1-year forward target price earnings ratio for the construction sector of 10 to 14 times, and its operations in Vietnam on a discounted cash flow basis. — RHB Research Institute, June 11
This story appeared in The Edge Financial Daily on June 12, 2012.
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