Saturday, February 8, 2014

Gamuda - Chugging On (MKE)

Gamuda - Chugging On
Share Price: MYR4.34
Target Price: MYR5.30

Gamuda-MMC is confident of clinching the KVMRT 2 PDP role.
Potential invocation of S114WSIAcould lead to short term weakness in share price.
Maintain BUY with an unchanged TP of MYR5.30.

What’s New
Gamuda remains confident ofclinchingthe PDP role for the KVMRT 2despite whispers on the contrary.However, the Gemas-JohorBarudouble track railconstruction award has been further delayed to 2015from late-2014. Meanwhile, property sales remain robust especially in Horizon Hills. As for itswater assetssale,potentialinvocation of S114WSIAhasraisedconcernon the offer value.Federal government’s decision is expected soon.

What’s Our View
Smooth progress of the KVMRT 1 construction and strong property sales would continue to underpin Gamuda’s earnings growth. The risk of the invocation of S114 could induceshort-term negative sentiment on the stock although the impact on the water asset sales is not certain yet. We take the view that the issue will be resolved amicably.

We maintain our 12M BUY call on Gamuda (TP pegged to 16.5x 2014 PER) forits earnings growth prospects and undemanding valuations. Gamuda is also aproxy for rail construction play.

Construction –Only KVMRT2in 2014
The government’s final go-ahead for the KVMRT 2 and appointment of its project delivery partner (PDP) is expected to be announced in 1Q14. Gamuda-MMC is confident of clinching the PDP role, riding on their track record in managing the KVMRT 1 construction. Post formal approval, land acquisitions, public feedbacks, tendering and job awards could take another year plus before the physical construction starts in 2016.

Gamuda’s construction division would focus on the KVMRT project only in 2014 as the government’s award of the Gemas-Johor Baru double track rail works looks likely to be postponed to 2015. Meanwhile, the government is in the midst of finalizing the Langat 2 water treatment plant project award but Gamuda thinks it is not the front-runner for the works.

Property –Enhancing long term growth
Property sales remain robust driven by Horizon Hills at Iskandar Malaysia as foreigners buy ahead of the proposed implementation of the MYR1m floor price on 1 May 2014. Gamuda has achieved MYR575m property sales for its Malaysian projects in 1QFY7/14. It could potentially beat its FY14 property sales target of MYR1.9b (+9% YoY).

Elsewhere, Gamuda is targeting to finalise 3 landbank acquisitions in 2014 in the Klang Valley, Iskandar Malaysia and Kota Kinabalu (KK). It has budgeted MYR1.5b for the acquisitions. The KK and Iskandar project would be undertaken via JVs and hence they would be less in capital start-ups for Gamuda. These potential landbanks could lift Gamuda’s total domestic property GDV by MYR8b (+59%) to MYR21.7b. Gamuda has also bidded for Kwasa’s Rubber Research Institute land development; it is shortlisted as a Tier 1 developer. These would fortify its property division long term earnings visibility and growth.

Selangor water saga continues…
The Selangor state government has withdrawn from negotiations with the concessionaires comprising Puncak Niaga Holdings Bhd, Syarikat Bekalan Air Selangor S/B (SYABAS), Syarikat Pengeluar Air Sungai Selangor S/B (SPLASH) and Konsortium Abass S/B for the acquisition of water assets in Selangor which paves the way for the federal government to step in to resolve the issue. The federal government has yet to decide on whether to invoke Section 114 of the Water Services Industry Act (WSIA) 2006 and is expected to make an announcement soon.

S114 states that the federal government can appoint the National Water Services Commission (SPAN) to assume control of “property, business and affairs of a licensee”. It is unclear whether this constitutes a force takeover of the water assets as well, in addition to the water operations. Nevertheless, it would still raise short term negative sentiment on Gamuda’s share price if the federal government decides to invoke S114. We take the view that the issue will be resolved amicably with business sense and sanctity of contracts to prevail.

The state government has also announced the termination of raw water licenses of water concessionaires excluding Puncak Niaga, effective 15 Feb 2014 and the issuance of a raw water licence to Kumpulan Darul Ehsan Bhd (KDEB), Selangor’s investment arm. However, Gamuda’s SPLASH has yet to receive any formal notice on the withdrawal of raw water license. This could indicate that water concessionaires would need to buy raw water from KDEB in the future.
Corporate exercises
The acquisition of an additional 40% stake in the Kesas Highway concession (lifting Gamuda’s stake to 70%) is expected to be completed by end-Mar 2014. This could positively provide a 2.4%/6.8% lift to our FY14/15 earnings forecasts for Gamuda. As for the potential takeover of KTM Bhd by Gamuda-MMC that was reported in the news recently, Gamuda did consider it in early-2013 but the idea was dropped due to feasibility issues. Meanwhile, plans to monetize its infrastructure assets via a separate listing or a business trust could be postponed as management thinks that the current market condition is less conducive.

Foreign shareholding
Alongside weaker foreign sentiment in the emerging markets, Gamuda’s foreign shareholding has also come off to 39% end-Dec 2013 from 48% at end-May 2013, a recent high. This is in line with the withdrawal of foreign funds in Malaysian equities with foreigners being net sellers since Jun 2013.

Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 27/01/14

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