Gamuda (GAMU.KL): Transfer of Coverage

Transfer of Coverage: 1Q09 Results - Worse Than Expected

Transfer of coverage - We are transferring primary coverage responsibility of Gamuda to Ng Yong Yin from Choong Wai Kee due to a reallocation of research resources.

1Q09 results below expectations - 1Q09 net profit of RM55m was 22% lower than the preceding quarter and 38% lower than last year's corresponding quarter. On an annualized basis, the results were 42% below our expectations.

Due to project delays and slower property sales - Management attributed the lower-than-expected results to the construction and property divisions. Earnings from construction division declined 52% YoY to RM16m. Construction division is said to be affected by delay in the progress of its Electrified Double Tracking Project (EDTP). While management says it relates to land acquisition in Penang, the State Chief Minister says Gamuda was issued a stop-work order.

The good news - There is no scale-back in EDTP contract value, and Gamuda may be able to claim costs of delay.

Earnings outlook lowered - In light of the lower-than-expected results and negative outlook, we lower FY09E, FY10E and FY11E net profit by 19%, 9% and 14%, respectively. Earnings in the next few quarters may be better than 1Q09, but full-year FY09E net profit is still expected to be lower from FY08.

Target price cut, maintain Sell (3L) - We lower our target price to RM1.45 per share. The revision reflects lower earnings outlook and our more cautious sentiment on the construction, property and trading business segments.