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PP 7767/09/2010(025354)

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts /B r ief ing N o t e
25 June 2010
MARKET DATELINE

Gamuda Share Price


Fair Value
:
:
RM3.21
RM2.74
9MFY07/10 Net Profit Grows 36% YoY, Lobbying Hard Recom : Underperform
(Maintained)
For KL MRT

Table 1 : Investment Statistics (GAMUDA; Code: 5398) Bloomberg: GAM MK


Turn- Net FD Net
FYE over Profit# EPS# Growth PER EPS# C.EPS* P/CF P/NTA ROE Gearing GDY
Jul (RMm) (RMm) (sen) (%) (x) (sen) (sen) (x) (x) (%) (%) (%)
2009 2,727.3 193.7 9.7 (40.7) 33.3 - - 9.7 2.0 6.2 0.1 2.5
2010f 2,958.5 277.0 13.6 41.4 23.5 13.5 15.0 (10.2) 1.9 8.1 0.2 3.7
2011f 3,370.5 326.6 16.1 17.9 20.0 15.6 19.0 (11.4) 1.7 8.7 0.4 3.7
2012f 3,194.9 331.3 16.3 1.5 19.7 15.8 22.0 nm 1.6 8.1 0.5 3.7
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC #Ex-EI * Consensus Based On IBES Estimates

RHBRI Vs. Consensus


♦ Missed consensus. 9MFY07/10 net profit came in within our expectation Above
at 74% of our full-year forecast but missed market expectation at only In Line
68% of the full-year market consensus. Below

♦ Lobbying hard for KL MRT. Gamuda was open about, it via its 50:50 JV Issued Capital (m shares) 2,018.8
with MMC Corp, lobbying hard for the much-talked-about RM36bn KL mass Market Cap(RMm) 6,480.3
rapid transit (MRT) project. It did acknowledge that at this point of time, it Daily Trading Vol (m shs) 6.3
“will not call it a project, but just a proposal pending the Cabinet’s 52wk Price Range (RM) 2.58-3.38
approval”. Major Shareholders: (%)

♦ Two new lines, one circle line. Key tentative terms and features of the
Raja Dato’ Seri Eleena 7.4
EPF 11.0

proposed KL MRT are:


Platinum Investment 6.2
1. The proposed RM36bn KL MRT will have two new lines, i.e. Damansara
– Serdang and Kepong – Kajang, and a circle line around KL City FYE Jul FY10 FY11 FY12
Centre, with a total length of 180km; EPS Revision (%) - - -

2. As per news reports, Gamuda said that the JV will only keep the Var to Cons (%) -9 -15 -26

tunneling works that make up about 30% of total project value with the PE Band Chart
remaining 70% to be awarded out to other players on a competitive
basis; PER = 30x
PER = 25x
3. The JV will assume the role of “Chariot Master” to drive the entire PER = 20x
PER = 15x
project and manage the interfacing between various work packages of
the project such as foundation, diaphragm walls, tunneling, stations
and M&E, tracks and systems; and
4. In the event the JV is unable to complete the project for various
reasons, the Government can seize the completed but not-yet-paid-for
work of up to RM3bn, as well as call on the JV’s performance bond Relative Performance To FBM KLCI
amounting to RM1.8bn.
♦ Work to start in Jan 2011? Gamuda is hopeful that work can start in
Gamuda
Jan 2011. We believe this target is simply too ambitious, if the much
delayed Ampang and Kelana Jaya LRT line extension project is a guide. On
project funding, we feel that Gamuda’s suggestion of “AAA-rated
government-guaranteed securities backed by assets in the form of certified FBM KLCI
completed works” may be easier said than done.
♦ Maintain Underperform. We are Neutral on the construction sector.
Indicative fair value for Gamuda is RM2.74, valuing its operations ex-
Vietnam at 14x fully-diluted CY11 EPS of 15.7sen, in line with our
benchmark 1-year forward target PER of 10-14x for the construction
Joshua CY Ng
sector, and its two property projects in Vietnam based on a 30% discount
(603) 92802151
to their NPV, translating to 54sen per Gamuda share on a fully-diluted joshuang@rhb.com.my
basis.

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9MFY07/10 Net Profit Grows 36% YoY, Lobbying Hard For KL MRT

♦ Missed consensus. 9MFY07/10 net profit came in within our expectation at 74% of our full-year forecast but
missed market expectation at only 68% of the full-year market consensus.

♦ Lobbying hard for KL MRT. Gamuda was open about, it via its 50:50 JV with MMC Corp, lobbying hard for the
much-talked-about RM36bn KL mass rapid transit (MRT) project. It did acknowledge that at this point of time, it
“will not call it a project, but just a proposal pending the Cabinet’s approval”. It said that it had presented the
proposal to the PM early this year and had “a few rounds of discussion with MOF (Ministry Of Finance)”. The
idea was also believed to be well received after having “sat down with Idris Jala” in a brain-storming session to
find ways to improve the public transportation system in the Klang Valley. With the KL MRT, Gamuda said that it
is not keen to bid for the RM7bn Kelana Jaya and Ampang light rail transit (LRT) line extension project anymore.

♦ Two new lines, one circle line. Key tentative terms and features of the proposed KL MRT are:
1. The proposed KL MRT will have two new lines, i.e. Damansara – Serdang and Kepong – Kajang, and a circle
line around KL City Centre, with a total length of 180km. These lines will be integrated with the existing
Kelana Jaya and Ampang LRT lines as well as the proposed Kelana Jaya and Ampang LRT line extension.
The much-talked-about new Kota Damansara – Cheras LRT line will be rendered unnecessary as the KL MRT
will cover the area supposed to be served by it;
2. The indicative price tag is RM36bn (based on 2010 prices) in two phases, i.e. RM23n for Phase 1 and
RM13bn for Phase 2, over ten years. There will be variation on price (VOP) clauses in the agreement that
entail a 50:50 sharing of higher or lower input costs with the Government. The price tag excludes land
acquisition (estimated to cost RM2bn) as well as additional rolling stock (estimated to cost RM3bn);
3. As per news reports, Gamuda said that the JV will only keep the tunneling works that make up about 30% of
total project value with the remaining 70% to be awarded out to other players on a competitive basis. For
the tunneling works, the contract price will be determined based on a “Swiss Challenge”, i.e. the JV will
match the best bid submitted by international contractors via an open bidding process;
4. The JV will assume the role of “Chariot Master” to drive the entire project and manage the interfacing
between various work packages of the project such as foundation, diaphragm walls, tunneling, stations and
M&E, tracks and systems. Independent consultants will be appointed to oversee the JV’s running of the
project and empowered to override the JV if the need arises; and
5. In the event the JV is unable to complete the project for various reasons, the Government can seize the
completed but not-yet-paid-for work of up to RM3bn (equivalent to the working capital the JV intends to
raise to fund the construction of the project), as well as call on the JV’s performance bond amounting to
RM1.8bn (5% of the contract value).

♦ Work to start in Jan 2011? Gamuda is hopeful that work can start in Jan 2011. We believe this target is
simply too ambitious, if the much delayed Ampang and Kelana Jaya LRT line extension project is a guide. Also,
it appears that the existing Malaysian laws are unclear on the ownership of land underground (where part of the
MRT will be built). There is a possibility that the existing Acts in relation to land acquisition will have to be
amended to accommodate the development of the KL MRT. On project funding, we feel that Gamuda’s
suggestion of “AAA-rated government-guaranteed securities backed by assets in the form of certified completed
works” may be easier said than done. Gamuda said that the JV has no intention to do the project on a private
finance initiative (PFI) basis as the project is not commercially viable.

♦ Forecasts. Maintained as we believe that it is premature to reflect any contribution from the KL MRT project.
Based on our back-of-the-envolope calculation, the project could boost Gamuda’s valuation by RM1,774m or
78sen/share on a fully-diluted basis, having discounted back potential profits from the project to NPV at 10%,
based on a PBT margin of 15% and a tax rate of 25%.

♦ Risks to our view. These include: (1) New contracts secured coming in above our target of RM1bn per annum
in FY07/10-11; and (2) Stronger-than-expected recovery in construction margins.

♦ We are Neutral on the construction sector. On one hand, we foresee improved investors’ risk appetite for
construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in 4Q2009
and 1H2010; and (2) A better sector news flow and new expectations on the heels of the recent announcement
of the 10th Malaysia Plan (10MP). On the other hand, certain negative elements remain such as: (1) The still
slow pace of the roll-out of public projects, a highly competitive market and declining dominance of established
players in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key
overseas markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases).

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♦ Maintain Underperform as upside exhausted. Indicative fair value is RM2.74, valuing its operations ex-
Vietnam at 14x fully-diluted CY11 EPS of 15.7sen, in line with our benchmark 1-year forward target PER of 10-
14x for the construction sector, and its two property projects in Vietnam based on a 30% discount to their NPV,
translating to 54sen per Gamuda share on a fully-diluted basis (see Table 4).

Table 2: Earnings Review (YoY Cumulative)


FYE Jul 2009 2010 YoY Observations/Comments
(RMm) 9M 9M Chg
Turnover 1,785.1 1,740.4 (3%)
Construction 1,422.2 1,283.8 (10%) In the absence of new jobs.
Property development 288.6 367.8 27% Recovery in the property market.
Concessions 74.2 88.7 19%
EBIT 139.1 180.2 30% Driven largely by improved construction margins.
Net inc/(exp) (36.2) (28.4) (21%)
Associates & JVs 98.8 113.2 14%
Pretax profit 201.7 265.0 31%
Taxation (44.7) (52.8) 18%
Minority interest (6.7) (8.1) 21%
Net profit 150.4 204.1 36% Driven largely by improved construction margins.
EPS (sen) 7.5 10.1 35%

Overall EBIT margin 8% 10% 3% pts


Construction EBIT margin 3.0% 5.0% 2.1% pts Cost pressure eased.
Pretax margin 11% 15% 4% pts
Effective tax rate 22% 20% (2% pts)

PBT breakdown*
Construction 42.6 64.8 52% Cost pressure eased.
Property development 64.1 79.8 25% Recovery in the property market.
Concessions 131.3 151.0 15% Growing water treatment plant O&M business of 80%-owned Gamuda Water,
rising capacity utilisation at SSP3 and traffic growth at LDP, KESAS and
SPRINT.
Elimination - (2.1) nm
Net inc/(exp) (36.2) (28.4) (21%)
Total 201.7 265.0 31%
*Including associates

Table 3: Earnings Review (QoQ)


FYE Jul 2010 2010 2010 QoQ Observations/Comments
(RMm) 1Q 2Q 3Q Chg
Turnover 624.0 603.2 513.2 (15%)
Construction 466.8 456.5 360.6 (21%) Normal quarterly fluctuation.
Property development 127.8 116.6 123.4 6% Normal quarterly fluctuation.
Concessions 29.4 30.1 29.2 (3%)
EBIT 55.5 59.6 65.2 9% Driven largely by improved margins.
Net inc/(exp) (11.2) (9.5) (7.7) (19%)
Associates & JVs 39.2 40.2 33.8 (16%)
Pretax profit 83.5 90.2 91.3 1%
Taxation (17.5) (20.0) (15.3) (23%)
Minority interest (3.0) (2.2) (2.9) 36%
Net profit 63.0 68.0 73.0 7% Driven largely by improved margins.
EPS (sen) 3.1 3.4 3.6 7%

Overall EBIT margin 9% 10% 13% 3%


Construction EBIT margin 4.0% 5.3% 6.0% 0.7% Cost pressure continued to ease.
Pretax margin 13% 15% 18% 3%
Effective tax rate 21% 22% 17% (5%)

PBT breakdown*
Construction 18.9 24.2 21.7 (10% pts) Driven by improved margins.
Property development 24.3 25.1 30.4 21% ps Product mix skewed towards higher-margin properties.
Concessions 52.1 51.2 47.7 (7% pts) One-off adjustment in amortisation of KESAS on reduced traffic
assumptions over remaining concession period.
Elimination (0.7) (0.7) (0.7) nm
Net inc/(exp) (11.2) (9.5) (7.7) (19%)
Total 83.5 90.2 91.3 1%
*Including associates

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Table 4: Sum-Of-Parts Valuation
Segment RMm RM/shr Basis
Operations ex-Vietnam 5,023 2.20 14x fully-diluted CY11 net profit of RM358.8m or 15.7sen/shr
Vietnam 1,231 0.54 Yenso Park, Hanoi: GDV of RM10bn and project life of 10 years
Tan Thang, HCMC: GDV of RM6bn and project life of 7 years
PBT margin of 25%, tax rate of 25% and benchmark discount rate of 10% for
property projects. A 30% discount to NPV of RM1,759m to reflect country risk
Total 6,254 2.74

Table 5: Outstanding Construction Orderbook


Project Balance Of Works (RMbn)
Ipoh – Padang Besar double-tracking project 3.5
Nam Thuen 1 hydroelectric project 1.8
Yenso Park Infrastructure works 0.8
Outstanding works in the Gulf states 0.4
Total 6.5
Source: Company

Table 6: Earnings Forecasts Table 7: Forecast Assumptions


FYE Jul (RMm) FY09a FY10F FY11F FY12F FYE Jul FY10F FY11F FY12F

Turnover 2,727.3 2,958.5 3,370.5 3,194.9 Construction EBIT margin (%) 4.1 7.2 8.8
Turnover growth (%) 13.5 8.5 13.9 -5.2 New orderbook secured (RMbn) 1.0 1.0 2.0

EBITDA 197.9 257.3 363.6 397.1


EBITDA margin (%) 7.3 8.7 10.8 12.4

Depreciation -14.1 -14.8 -15.6 -16.4


Net Interest -44.8 -38.2 -76.6 -101.7
Associates 143.2 176.2 176.2 176.2
EI 0.0 0.0 0.0 0.0

Pretax Profit 282.2 380.4 447.6 455.2


Tax -78.0 -95.1 -111.9 -113.8
PAT 204.2 285.3 335.7 341.4
Minorities -10.5 -8.3 -9.2 -10.1
Net Profit 193.7 277.0 326.6 331.3
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

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Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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