By Khairie Hisyam
Latest official statistics indicate a tapering of growth for the construction sector as a whole. Add that to ongoing turbulence in the property sector and questions arise whether Gamuda is still a good exposure to both sectors.
Business model: Gamuda Bhd is an engineering, infrastructure, and property group incorporated in October 1976. It debuted on the Main Market of Bursa Malaysia in August 1992.
The company has three core businesses: engineering and construction, infrastructure concessions, and property development. In recent years, the company has been a leading name involved in Malaysia’s largest mega public projects including highways, the SMART Tunnel project, and the first line of the Klang Valley Mass Rapid Transit (KVMRT1) project.
For the KVMRT1 project, Gamuda is in a 50:50 partnership with MMC Corp Bhd and the joint-venture vehicle was named project delivery partner (PDP) in January 2011.
Engineering and construction is the largest revenue driver for Gamuda, bringing in 68% of full-year revenue for the 2014 financial year ended July 31, 2014 (FY14). In addition to more than 40 major civil engineering works completed domestically, the division has also secured projects in India, Taiwan, Qatar, and Bahrain since the turn of the century.
Meantime, property development and club operations comprised 28% of its FY14 revenue, with developments in the Klang Valley and Iskandar region, as well as two townships in Vietnam, according to its website.
The infrastructure concessions encompass long-term concessions for Shah Alam Expressway, Damansara-Puchong Highway, and the SPRINT highway (30 years or more), as well as a 40-year concession for the SMART Tunnel. It also owns an associate stake in Syarikat Pengeluar Air Selangor (SPLASH).
Going by contribution to group pre-tax earnings, however, the distribution somewhat more even: engineering and construction 47%, property development and club operations 23%, and infrastructure concessions 30%, based on FY14 figures.
Shareholders and management: Permodalan Nasional Bhd through various vehicles hold a cumulative 18% stake in Gamuda, according to its 2014 annual report.
Other notable substantial shareholders include the Employees Provident Fund with 7.67%, while Retirement Fund Inc has 6.01% as of the report. Raja Eleena Sultan Azlan Shah, a non-executive board member, holds 5.32% interest.
Gamuda’s management is led by group managing director Lin Yun Ling, who first joined the company in 1978 as a senior project manager. He is assisted by deputy group managing director Ha Tiing Tai and several executive directors.
Most recently, the company posted RM553.8 million revenue for the third quarter ended April 30, 2015 (3Q15), 12.6% lower year-on-year, which led to a 9.8% drop in 3Q15 net profit to RM160.4 million.
Year-to-date, however, Gamuda is at RM1.77 billion revenue for the nine-month-period up to end-April, 8.5% higher year-on-year, as net profit rose by a marginal 3% to RM527.5 million.
This, however, is largely driven by additional earnings from its stake in the Shah Alam Expressway concessionaire, said Gamuda, which offset falling earnings in both construction and property arms.
Based on historical filings to Bursa Malaysia the company is expected to release 4Q15 results in end-September or early October.
Share performance: If you had bought Gamuda shares around this time last year, you would be staring at a one-year loss of 7.9%, according to Bloomberg data on Aug 13.
Year 2015 has been mixed for the counter. While it began the year at RM5.01 and climbed to a multiple-year high of RM5.35 on Feb 26, it then began a general downtrend that saw the counter close at RM4.35 on Aug 13, a one-year low.
This puts its price-earnings ratio at 13.88, according to Bloomberg.
For each of the past two financial years, Gamuda has issued a full-year dividend of 12 sen per share; and MIDF Research expects the same amount per share for FY15, which translates into a rough dividend yield of about 2.6%.
The counter is suspended from trading on Aug 14 pending a material announcement, according to a late evening announcement on Bursa Malaysia dated Aug 13.
Earnings forecast:
What analysts think: Research houses with relatively recent rating updates are of mixed opinions on Gamuda. While AmResearch is bullish, TA Securities is bearish, and MIDF Research stands in the middle.
In mid-July updates, AmResearch and TA Securities took opposite rating stances on news that the Gamuda-MMC Corp partnership has officially signed to become the PDP for the second line of the KVMRT project. If certain key performance indicators are met, the partnership stands to receive a fee of 6% of the second line’s total cost.
The news is seen as positive for Gamuda’s earnings outlook by AmResearch, noting that assuming a 6% fee and that construction works begin in 2H16, Gamuda’s FY17 net profit is expected to rise by 6% as a result.
Other potential catalysts for Gamuda are a potential PDP appointment for the Penang Transport Master Plan (PTMP) and a potential conclusion to stalled negotiations involving SPLASH in the Selangor water restructuring saga, noted AmResearch.
While the PDP signing for KVMRT2 comes as no surprise to TA Securities, its concern arises from the company’s share prices, which closed at RM4.84 on July 13. “We think the current share price has reflected its fair value,” said TA Securities on July 14.
More recently, MIDF Research visited a construction site of the KVMRT1 project and noted positively that Gamuda remains a pack leader domestically in terms of the bidding for KVMRT2, the Light Rail Transit Line 3 extension project, and the PTMP – in particular due to strong financial muscle and extensive experience vis-a-vis tunnelling works and geotechnics.
Of particular note is that Gamuda’s technical capability in tunnelling, which includes the distinction of being the only company in the world possessing the VDTM technology (which can reduce sinkholes occurrences) which it co-developed MMC Corp and Herrenkencht GmBH.
“(However) it must be noted that any potential contributions from said projects (above) will only be reflected in the period of FY17 further,” said MIDF Research.
That said MIDF Research retains a neutral outlook on the basis of current headwinds in the sectors Gamuda is involved in, as well as a risk of divestment loss in SPLASH should currently-stalled negotiations are not resolved in Gamuda’s favour.
StockStalk: While Gamuda’s prospects look good in the immediate term, headwinds in the property and construction sector remain an issue to consider before taking the plunge. The current political uncertainty is also worth pondering.
News of the KVMRT2 PDP role for Gamuda’s partnership with MMC Corp in July is a significant boost for the company’s earnings prospects. Its technical expertise bodes well for future involvement in public mega projects such as the PTMP.
However, this in turn raises the concern of whether Gamuda is too dependent on mega government projects to drive earnings. A possible change in government mood and policies concerning future mega projects may impact its prospects going forward.
That said, a more immediate concern for Gamuda would be the apparent tapering of the construction sector boom seen in recent years. Official statistics released on Aug 12 showed a slowing of growth rate for the construction sector in 2Q15, falling into single-digit year-on-year growth rate for the second time in three consecutive quarters after several years of double-digit growth rates.
An important point, however, is that the construction sector remains in positive growth territory despite any tapering of growth. A closer look at official data reveals that the Klang Valley and Johor comprise an increasingly larger share of overall construction activity.
These may bode well for the company as it suggests some staying power by virtue of its technical edge in mega projects and established track record.
As for the turbulence seen in the property sector in recent years due to a tightening of lending as well as other measures by Bank Negara to cool down the sector, its financial strength should provide support.
More importantly the property division has proven resilient. Up to first nine months of financial year 2015, the company has recorded RM813 million in property sales and has some RM1.3 billion in unbilled sales.
Gamuda management previously has indicated that it thinks property sales have bottomed and is preparing to launch some RM1.7 billion worth of properties in FY16.
Another important point to note is that Gamuda counts some 30% or so of its full-year pre-tax earnings from concession income, which provides a bedrock against fluctuating earnings.
Near-term sector headwinds notwithstanding, the long-term fundamentals of Gamuda remain strong and the company remains a top pick for exposure to the construction sector, especially when it comes to transport infrastructure projects.
Meantime, the recent share price weakness should provide attractive opportunity to enter for investors with a long-term horizon. Any uptick in sector outlook for property and construction, as well as further good news in terms of major project clinches, would likely spur the counter upwards.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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