Government had given the final approval for the MRT Sungai Buloh-Serdang-Putrajaya Line (SSP Line) railway scheme
KUALA LUMPUR: CIMB Equities Research is retaining Gamuda as its top pick among the big capitalised stocks for the multi-billion ringgit of rail tunnelling jobs in the Klang Valley and other road projects especially the Pan Borneo Highway (Sabah).
It said on Tuesday its target price of RM5.88 for the infrastructure company remains pegged to a 10% realised net asset value (RNAV) discount and implies a 19% upside.
“We maintain our FY17-19 EPS forecasts. Key downside risks are delays in job roll-out and the SPLASH deal,” it said.
CIMB Research said its revised addressable market size for domestic rail and tunnelling contracts reinforces Gamuda’s position as among the likely biggest beneficiaries of this segment over the medium to longer term.
Much improved job replenishment visibility is underpinned by the research house’s estimated RM41bil total addressable tenders for rail tunnelling projects. A key driver to this is the MRT 3 Circle Line, which is still being studied.
Chances of Gamuda exceeding CIMB Research’s RM2bil assumed new wins this year remain good.
Its internal RM3bil to RM4bil job replenishment target comprises larger-value rail contracts (LRT 3 and the China-led Gemas-Johor Baru double-tracking) and a portion of the Pan Borneo Highway (Sabah).
It said the Pan Borneo Highway (Sabah) was likely to be accelerated in conjunction with the impending general elections that, based on its Market Strategy and Outlook, could occur in 2H17 at the earliest. In its best case, there is 20%-30% upside to its RM8.9bil order book.
“With a healthy order book-revenue cover of 4.4 times, we expect the momentum of construction earnings in 1QFY7/17 (+20% on-year, 8.5% pretax margin) to be sustained in the coming quarters.
“Physical work progress for MRT 2 stood at c.2% as at end-2016 and we forecast the progress billings to hit a reasonable 20% mark by end-2017.
“We have assumed a blended construction pretax margin of 9%, which could rise to 10%-11% within the next two years, similar to the peak of the previous MRT 1, as jobs go full swing,” it said.
CIMB Research also said the perceived overhang on the stock arising from the long-delayed sale of 40%-owned SPLASH (water asset) could slowly diminish in the coming months.
“The April target for a new deal and price tag for Splash now points to the possibility of a special dividend, in our view, as the company has no immediate major capex plans.
“Our sensitivity analysis based on a hypothetical RM1.1bil share of proceeds shows that the combined dividend yield could be 7% if at least 50% of the cash is set aside as special dividends.
“The potential revival of construction plays and investors’ preference for big-cap infra laggards could trigger a recovery in Gamuda’s foreign shareholding, which stands at a low of 22% (vs. over 60% pre-Asian Financial Crisis in 2007 and 45%-50% prior to securing MRT 1 in 2012).
“This is unjustified, in our view, given the improved job outlook, greater conviction of the cash-enhancing SPLASH deal and new job opportunities from the RM55bil ECRL, RM50bil HSR, RM40bil MRT 3 and potential new overseas rail tunnelling jobs,” it said.
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