MRT and Vietnam to transform Gamuda's earnings

Gamuda Bhd (Apr 27, RM3.78)
Maintain buy at RM3.79 with target price of RM5.25: While the tunnelling tender for the KL Mass Rapid Transit (MRT) system will be via Swiss challenge, we remain confident that the project delivery partner's reputation and overall better cost structure compared with foreign contractors will see it emerge the winner.

The tunnelling job for all three lines is worth about RM20 billion based on 40% of total MRT contract value of RM50 billion. Guidance is for 15% tunnelling pretax margins against 5% for non-tunnelling. The time line for the award of the approved Sungai Buloh-Kajang tunnelling works is by 1QCY12 (RM7.5 billion), and the other lines by 3QCY12. There is room to raise our RM2 per share discounted cash flow (DCF) value for the MRT project (we factored in 50% value in our sum-of-parts), premised on RM14 billion total tunnelling works and 8.3% blended margins.

We have raised FY12F/13F earnings by 12% to 30% to build in stronger local property sales of RM1.1 billion for each year (against RM730 million to RM790 million previously). Property sales in 6MFY11 of RM600 million implies Gamuda could exceed its RM1 billion FY11 sales target, which will be revised to RM1.3 billion because of the buoyant market. We also assume maiden sales contribution from Vietnam of RM1.2 billion and RM1.7 billion for FY12/13F respectively, based on average 60% take-ups and 16% to 18% margins. These are below Gamuda's targets of RM1.5 billion and RM2.1 billion and 20% to 25% margins. Celadon City in Ho Chi Minh City, slated for launch soon, is seeing strong interest (200 out of 250 units pre-registered). Gamuda City in Hanoi will receive in total 40ha of land by July, sufficient for three years of launches. The launch is scheduled for July.

We maintain our "buy" call on Gamuda which is still most leveraged to the RM50 billion MRT. There is the likely conversion of RM10 billion (50% share) tunnelling contract wins in CY12 with lucrative 15% margins. Despite the expected higher earnings, there is no change to our target price because it is DCF-based. — HwangDBS Vickers Research, Apr 27