PP 7767/09/2010(025354)

Malaysia Corporate Highlights

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

Company Update
28 June 2010
MARKET DATELINE

Gamuda Share Price

Fair Value
:
:
RM3.24
RM3.85
A “Tactical” Construction Play In A News Flow Driven Recom : Trading Buy
(Upgraded)
Market

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) 33.6 - - 9.8 2.1 6.2 0.1 2.5
2010f 2,958.5 277.0 13.6 41.4 23.7 13.5 15.0 (10.3) 1.9 8.1 0.2 3.7
2011f 3,370.5 326.6 16.1 17.9 20.1 15.6 19.0 (11.5) 1.8 8.7 0.4 3.7
2012f 3,194.9 331.3 16.3 1.5 19.8 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

Issued Capital (m shares) 2,018.8

♦ Upgrade to Trading Buy. We are upgrading Gamuda to Trading Buy Market Cap(RMm) 6,540.9
from Underperform as we foresee strong performance in its share price in Daily Trading Vol (m shs) 6.3
2H2010, buoyed by news flow, primarily, from the RM36bn KL mass rapid 52wk Price Range (RM) 2.58-3.38
transit (MRT) project. Major Shareholders: (%)
EPF 11.0
♦ Events to drive share price. Assuming the project is to eventually Raja Dato’ Seri Eleena 7.4
materialise and the contract goes to the 50:50 Gamuda-MMC Corp JV, Platinum Investment 6.2
between now and the actual award of the contract, a series of events can
FYE Jul FY10 FY11 FY12
buoy Gamuda’s share price including: (1) The expected almost daily doses EPS Revision (%) - - -
of news and commentaries on the project; (2) The green light for the Var to Cons (%) -9 -15 -26
project from the Cabinet; (3) The thumbs up for the project from
businesses and the public; and (4) The commencement of the actual PE Band Chart

physical works ahead of the formal award of the contract.

♦ Worry about hurdles and issues another day. While we believe the
market is fully aware of the hurdles and issues with regards to project
execution, be them political, legal, financial and technical, it is more PER = 30x
inclined to worry about them another day. The comfort can also be drawn PER = 25x
PER = 20x
from the fact that the Government has thrown its full weight behind the PER = 15x
project by identifying it as one of the key priorites under the recently
announced 10th Malaysia Plan (10MP). Relative Performance To FBM KLCI

♦ The project is worth RM1.8bn NPV to Gamuda. Based on our

estimate, the project could boost Gamuda’s valuation by RM1,825m or
80sen/share on a fully-diluted basis, assuming a PBT margin of 20% (at FBM KLCI
the “Chariot Master” level) and a tax rate of 25%, and having discounted
back the potential profits to NPV at 10%.
Gamuda

♦ Forecasts. Maintained.

♦ Risks to our view. These include: (1) New contracts secured coming in
below our target of RM1bn per annum in FY07/10-11; (2) The RM36bn KL
MRT project fails to get off the ground; and (3) Rising input costs.

♦ Fair value upgraded to RM3.85. We are now upbeat on the

construction sector. For Gamuda, an additional kicker can come from the Joshua CY Ng
(603) 92802151
RM36bn KL MRT project. Indicative fair value based on “sum of parts” is
joshuang@rhb.com.my
raised by 40% from RM2.74 to RM3.85, after having reflected the potential
enhancement from the KL MRT project.

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 A “Tactical” Construction Play In A News Flow Driven Market

♦ Upgrade to Trading Buy. We are upgrading Gamuda to Trading Buy from Underperform as we foresee
strong performance in its share price in 2H2010, buoyed by news flow, primarily, from the RM36bn KL mass
rapid transit (MRT) project (and to a lesser extent, the restructuring of the water sector in the Klang Valley that
will enable Gamuda to unlock the value of its 40% stake in water concessionaire Splash).

♦ A series of events to drive share price performance. Gamuda’s share price has been on an uptrend since
the news on the KL MRT broke early this month. While hurdles and issues with regards to project execution, be
them political, legal, financial and technical, remain to be overcome, we believe the market being the market, is
prepared to position itself ahead of the curve. This collective “buy-first-on-news” mentality, we believe, is
powerful enough to take Gamuda’s share price to higher levels. Assuming the project is to eventually
materialise and the contract goes to the 50:50 Gamuda-MMC Corp JV, between now and the actual award of the
contract, a series of events can buoy, if not sustain Gamuda’s share price. These include:
1. The expected almost daily doses of news and commentaries on the KL MRT project and the Government’s
plan to improve the public transportation system in the Klang Valley under the newly announced 10th
Malaysia Plan (10MP);
2. The green light for the project from the Cabinet;
3. The thumbs up for the project from businesses, particularly, property developers, and the public; and
4. The commencement of the actual physical works, particularly, site preparation, as we believe the Gamuda-
MMC Corp JV is inclined to start ahead of the formal award of the contract (as in the case of the SMART
tunnel a few years ago).

♦ Worry about hurdles and issues another day. Given the unprecedented scale of the project, we believe the
market is fully aware that the execution is not going to be a stroll in the park. However, the market will worry
about it another day. The key issues or hurdles of execution could potentially be:
1. Political – “Equitable” participation of players in the project, changes in alignment and placement of stations
to enhance land values of certain players, particularly, the GLCs, etc;
2. Legal - 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 project;
3. Financial - 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. The JV has no intention to
carry out the project on a private finance initiative (PFI) basis as the project is not commercially viable; and
4. Technical – The generally soft ground conditions around the KL City Centre area, and tunneling underneath
the KL metropolitan area with high-rise buildings standing atop, will make tunneling works technically highly
challenging. However, we take comfort that the SMART tunneling done by the Gamuda-MMC Corp JV was
three times larger in terms of radius.

♦ However, given that the Government has thrown its full weight behind the project by identifying it as one of the
key priorites under the 10MP, we believe the will to overcome these hurdles and issues will be relatively strong.

♦ A brain child of Gamuda-MMC Corp. To recap, the RM36bn KL MRT project is a brain child of the Gamuda-
MMC Corp JV and the key tentative terms and features of the project are:
1. It 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. 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;

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 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).

♦ Pending Cabinet approval. It terms of status, the proposal has already been presented to the PM and “a few
rounds of discussion with MOF (Ministry Of Finance)” have taken place as well. The idea is also believed to have
been well received, after the representatives from the JV having “sat down with Idris Jala” in a brain-storming
session to find ways to improve the public transportation system in the Klang Valley.

♦ Forecasts. Maintained as we will only reflect contribution from the project upon the formal contract award.
However, based on our estimate, the project could boost Gamuda’s valuation by RM1,825m or 80sen/share on a
fully-diluted basis, assuming a PBT margin of 20% (at the “Chariot Master” level) and a tax rate of 25%, and
having discounted back the potential profits to NPV at 10% (see Table 2).

Table 2: NPV of KL MRT

Year 1 2 3 4 5 6 7 8 9 10
Turnover (RMm) 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600 3,600
Net profit (RMm) 540 540 540 540 540 540 540 540 540 540
Discount factor 1.0 1.1 1.2 1.3 1.5 1.6 1.8 1.9 2.1 2.4
NPV (RMm) 540 491 446 406 369 335 305 277 252 229
Total NPV (RMm) 3,650
Gamuda's 50% share (RMm) 1,825
NPV/share, fully-diluted (RM) 0.80
Source: RHBRI

♦ Risks to our view. These include: (1) New contracts secured coming in below our target of RM1bn per annum
in FY07/10-11; (2) The RM36bn KL MRT project fails to get off the ground; and (3) Rising input costs.

♦ We are now upbeat on the construction sector. 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 10MP. These will outweigh 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).

♦ Fair value upgraded to RM3.85. For Gamuda, an additional kicker can come from the RM36bn KL MRT
project. Indicative fair value based on “sum of parts” is raised by 40% from RM2.74 to RM3.85, valuing:

1. Its operations ex-Vietnam at 16x (from 14x previously) fully-diluted CY11 EPS of 15.7sen, in line with our
widened benchmark 1-year forward target PER of 10-16x for the construction sector;

2. Its two property projects in Vietnam based on a 30% discount to their NPV, translating to RM1,231m or
54sen per Gamuda share on a fully-diluted basis; and

3. The KL MRT project at RM1,825m or 80sen per Gamuda share on a fully-diluted basis, assuming a PBT
margin of 20% (at the “Chariot Master” level) and a tax rate of 25%, and having discounted back the
potential profits to NPV at 10% (see Table 3).

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Table 3: Sum-Of-Parts Valuation
Segment RMm RM/shr Basis
Operations ex-Vietnam 5,023 2.52 16x 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
KL MRT 1,825 0.80 NPV based on PBT margin of 20% (at the “Chariot Master” level)
Tax rate of 25% and a discount rate of 10%
Total 6,254 3.85

Table 4: 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 5: Earnings Forecasts Table 6: 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
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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
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The recommendation framework for stocks and sectors are as follows : -

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM 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 FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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

Industry/Sector Ratings

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

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

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

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actions of third parties in this respect.

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