Gamuda (Outperform)

Stock:GAM MK
Name:Gamuda
Price: RM1.82
Market Cap (m): RM3,651
Market Cap (m): US$1,026
Current valuation (Sum of Parts): RM3.08
12mth price target: RM3.08
Recommendation: Outperform


Event
Gamuda reported 1Q FY09 net profit of RM58m, down 38% YoY and 22% QoQ, comprising just 12% of our full-year estimate.

Impact
Construction margins squeezed: Construction margins for the quarter came in at only 3.2% (vs 5% last quarter) and were attributable to high raw material costs and delays in the Double Tracking project. We understand that despite a significant fall in raw material prices (steel and oil), management has chosen to recognise profits on its projects on a conservative basis, given the volatility in prices and the long duration of its projects. Gamuda accounts for construction margins as a percentage completion of the estimated profit for the entire duration of the contract.

Delays in Double Tracking: Management highlighted that the Double Tracking project is estimated to have been delayed by at least a year due to delays in handing over the land in the state of Penang by the government. The Gamuda-MMC JV has been handed out about 61% of the total land required for the project, and it expects to receive the balance (mainly in Penang) by December 2009. As a result, revenue recognition from the project is likely to be at a slower rate compared to our expectations. On the positive side, however, the contract value has been maintained at RM12.5bn vs earlier indications of a reduction in value to ~RM10bn. As per the terms of the contract, the JV Co. is allowed to make claims for losses suffered as a result of delay in handing over the land, which is the responsibility of the government.

Property sales down significantly QoQ: Property sales were down nearly 40% QoQ as volumes in the domestic market dropped off, while margins were also affected due to higher raw material costs. Gamuda's unbilled property sales stood at RM500m as at end-1Q FY09.

Yen So Park works progressing, but land parcel sales likely to be delayed: The infrastructure works for the Vietnam project continue to progress with the construction of the sewage treatment plant commencing during the quarter. Management also highlighted that while it continues to negotiate with interested parties for land parcel sales, the credit crisis has impacted the borrowing ability of the clients, and consequently, there are likely to be further delays in concluding sales. We had factored in RM122m in EBIT from land parcel sales in Vietnam for FY09E.

Cautious guidance: Management guided for construction margins to remain at 1Q FY09 levels for the next two quarters (vs our full-year expectation of 8.7%) and for property sales to remain muted for the rest of the year. However, management also highlighted that it remained hopeful that the Malaysian government will hand out key infrastructure projects such as LRT lines some time in 2009 in order to pump prime the economy.

Dividend cut, cash conservation is the theme: Management cut its interim dividend to 4sen (vs 12.5sen last year) and guided for an 8sen full-year dividend in an effort to conserve cash. On the positive side, Gamuda's net gearing fell to 22% (from 32% last quarter). We also note that receivables fell QoQ, with management highlighting that Double Tracking payments were being received in a timely manner.

Action and recommendation
We maintain our Outperform recommendation on Gamuda. Although we see downside risk to our near-term earnings estimate, we believe that a large portion of this has already been factored into Gamuda's share price. We value Gamuda's stake in its concessions at RM1.61/sh (including a 25% discount to the fair value of SPLASH). At the current share price, the market is implying just 3x PER for the balance businesses (construction and property) based on the annualised 1Q FY09 numbers, which are likely to be near-trough earnings for the company over the next two years.