HWangDBS Report About Gamuda, TP RM4.45

Gamuda (RM2.95; Buy; Price Target: RM4.45; GAM MK)
Carving out the most lucrative portion
The Edge weekly carried a cover story on the proposed MRT system. Below are some key salient points :-

1. The project size is estimated at RM36bn vs earlier estimate of RM30bn. This makes it the biggest mega project in Malaysia’s history;
2. The project could receive RM3.6bn or 10% of cost from the facilitation grant of RM20bn set aside for PPP projects during the 10MP;
3. The proposal by MMC-Gamuda was unsolicited and the government has decided to put it out to tender in a ‘Swiss challenge’. Other parties in particular a China company led consortium is threatening to steal this project away from the JV.
4. Gamuda-MMC JV will only be bidding for the tunnelling portion works estimated at 30% of project cost or RM10.8bn in spite of it being the mastermind behind the proposal. About 70% of project cost will be competitive bidding which the JV cannot bid due to conflict of interest. Foreign contractors will only be allowed to bid for the remaining 30%.
5. The rationale of the project is to bring Malaysia more in line with other developed countries in terms of number of km of rail per one million population. Malaysia currently stands at 15 vs Singapore of 40, Hong Kong of 26, Seoul of 27, London of 53 and New York of 47.
6. Gamuda-MMC JV has set a target of 40% of all trips in and out of Greater KL done via public transport and half of this done via rail by 2020. Currently Greater KL has a population of 4.3m. Of the 8m trips done to and fro everyday, only 18% or 1.44m trips are via public transport (bus and rail) and of this 1.44m trips, only 400,000 or 20% are done via rail.

Our view : We remain confident of the JV clinching the tunnelling portion works worth RM10.8bn in spite of talks of competition from other parties. While the contract amount of RM10.8bn for the JV is lower than expected (RM5.4bn equalled shared between Gamuda and MMC), we expect this portion to be the most lucrative carrying the highest margins. Gamuda’s current orderbook stands at RM7bn. Hence this project could lift its orderbook by 77% to RM12.4bn. Assuming a pretax margin of 12%, potential profit accretion throughout the tenure of the project is RM648m or 24 sen per share.

We reiterate our Buy rating and SOP-derived TP of RM4.45/share.

Published by
HWANGDBS Vickers Research Sdn Bhd (128540 U)