By A. Stephanie
Gamuda Bhd was downgraded to hold or neutral by three research houses today, on the back of slower property sales due to oversupply in the Iskandar region and delays in Mass Rapid Transit Line 2 (MRT2) contract rollouts.
Though Gamuda’s 2Q15 results was in line with analysts expectations with profits after tax and minority interest (PATAMI) of RM368 million, MIDF Research, HongLeong Investment Bank (HLIB) and Kenanga cut their buy calls on the share.
Slow local property sales
Downgrading the construction giant to neutral with a RM4.83 target price, MIDF expects FY16 earnings growth to be lower due to tail-end works for MRT1 and slower property sales for Gamuda’s existing projects.
In view of current trend of local property presales particularly in Iskandar, Johor which is likely to persist through 2015 and 2016, MIDF said Gamuda management has cut its new sales projection to RM1.2 billion, down 34% from RM1.6 billion previously.
Nevertheless, the analyst noted that Hanoi market sales improved, contributing to Gamuda’s current unbilled sales of RM1.5 billion.
Cognizant of the local slowdown, MIDF noted that Gamuda has continued aggressively acquiring Melbourne landbanks with the purchase of 0.4 acres freehold land for a A$40 million (RM115 million).
“We understand that this land will be developed into 150 apartment units with an estimated gross development value of RM380m. Gamuda plans to launch this in 4Q15 with a 3-year development period,” MIDF noted.
“Though Gamuda registered steady earnings growth in 1H15, momentum tapered off with RM182.2m net profit in 2Q15, less 2% compared to the previous quarter.
However, MIDF is encouraged by tolls concessions growth which contributed RM99.8m – up 39% year on year – to group profit before tax (PBT) after consolidating KESAS highway last year.
“This has at least offset the shortfall in its two key segments’ (property and constructions) earnings contribution,” MIDF said.
The research house expects unexciting earnings for Gamuda’s construction segment until commencement of works for MRT2 which is expected to uplift earnings in FY17.
MRT2’s 3-6 month delay
In its analyst briefing yesterday, Gamuda confirmed that contracts roll out for the RM23 billion MRT2 construction works is expected to be slightly delayed by three to six months.
Believing that the company has reached a temporary plateau, HLIB Research revised its target price for the stock lower at RM5.30.
It said, “While we like Gamuda as the key beneficiary to the MRT play, the delay for MRT2 means that earnings momentum will hit a temporary plateau for FY15-17. It is also likely that property sales could surprise on the downside. As such, we downgrade our rating from buy to hold.
“Earnings should peak in FY15 (with minimal growth at 5%) as the civil works for MRT1 will be largely completed. Given the delays for MRT2 and the eventual flow thru effect from weak property sales, we project FY16-17 earnings to decline by 4% and 1% respectively,” it said.
Despite the new timeline of MRT2 implementation leading to major contracts only being awarded mid-2016, HLIB noted several silver linings for Gamuda: “On a brighter note, land acquisition for Line 2 has begun.
“Moreover, the MRT2 alignment changes will incorporate a new station at Bandar Malaysia. This change increases the underground stretch by 1km, which we view positively for the MMC-Gamuda JV as it remains the top contender for the tunnelling works,” HLIB remarked.
Echoing these views was Kenanga, which downgraded the counter to market perform with a target price of RM5.29.
“With the delay in MRT2 implementation and slowdown in the property market, Gamuda’s near to medium-term earnings outlook could be challenging,” its analyst said.
2015: decision time
For the longer term, Gamuda is shortlisted for the project delivery partner (PDP) role for the RM27 billion Penang Integrated Transportation Masterplan and the RM9 billion LRT3 project.
Kenanga remarked, “For the Penang project, we prefer that Gamuda becomes contractor for PDP rather than taking on the PDP role itself. This is due to the magnitude of the project’s size which can easily hit the group’s balance sheet, assuming land swap or reclamation payment method.
“As for LRT3, Gamuda may surprise on the upside should they win the project given the intense competition. Shortlisted contractors namely Sunway, MRCB-George Kent, WCT-MTD Capital and UEM Group have railway expertise and hence, are all equal contenders,” Kenanga said.
The research house expects both projects to be awarded by middle to end of this year.
Other analysts maintain their calls on the stock, TA Research being the lone sell call with a RM4.92 target price.
Meanwhile, PublicInvest, BIMB Research, UOB KayHian maintained their hold and neutral calls on Gamuda with target prices ranging from RM4.90 to RM5.40.
Most optimistic among analysts were Maybank KimEng, AmResearch, AllianceDBS, and CIMB Research, all keeping their buy or add calls on the stock. Target prices range from RM5.80 to RM6.20.
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