By Khairul Khalid
With its MRT1 jobs at tail-end stages, Gamuda is looking forward to tenders for the RM28 billion MRT2 project next year to anchor its next cycle of earnings growth.
Business model: Gamuda Bhd’s three core business segments are engineering and construction, infrastructure concessions, and property development. The company was incorporated in 1976 and listed on Bursa Malaysia in 1992.
The company has been involved in some of Malaysia’s largest infrastructure mega projects including major highways. Its 50:50 joint venture MMC-Gamuda is a project delivery partner (PDP) for the first line of the RM23 billion Klang Valley Mass Rapid Transit (MRT1) project.
Last August, Gamuda received a Letter of Award – via SRS Consortium – to become the PDP for the RM27 billion Penang Transport Master Plan (PTMP) project. The shareholding structure for the SRS consortium is Gamuda with a 60% stake, Ideal Property Development (20%), and Loh Poh Yen Holdings (20%).
It is also reportedly bidding for jobs in the RM9 billion LRT3, RM27 Sarawak Pan Borneo Highway as well as the RM8 billion Southern Double Track projects.
Besides its engineering, construction and property businesses, Gamuda is also one of the biggest highway concessionaires in the country. Other than LDP and Kesas, it also operates the SPRINT highway.
The company has a 40-year concession to operate and maintain the Stormwater Management and Road Tunnel (SMART). Gamuda also owns a stake in Splash, the last remaining private water concessionaire in Selangor. It is reportedly in negotiations with the Selangor government to take over the water business in the state’s protracted restructuring of the water industry.
On Dec 16, Gamuda posted a nett profit of RM161.2 million for the first quarter of financial year 2016 (1Q16), down 13.2% year-on-year (y-o-y). Revenue for the quarter also fell 9.9% y-o-y to RM512.7 million.
The company attributed the lower profits to the completion of the electrified double-tracking railway project in November 2014 and the sluggish property market in the country.
Based on Gamuda’s 1Q16 financial results, the largest revenue driver for Gamuda is construction and engineering at approximately 68%, followed by property development (22%), and expressway and water (10%).
Shareholders and management: According to a TA Securities report dated Dec 17, the major shareholders of Gamuda are the Employees Provident Fund with 11.18%, followed by Skim Amanah Saham Bumiputera (6.33%), Lembaga Tabung Haji (5.37%), KWAP (5.18%) and Generasi Setia (M) Sdn Bhd (5.11%).
The latter is a vehicle of Raja Eleena Sultan Azlan Shah, younger sister of Sultan of Perak Raja Nazrin Shah. She is also a non-executive board member of Gamuda.
Currently, Gamuda has a market capitalisation of approximately RM10.5 billion. Around 48% of its shares are free-float.
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.
Share performance:
Earnings forecast:
What analysts think: According to a TA Securities report dated Dec 17, Gamuda’s expected earnings drop for its financial year 2016 (FY16) will likely be offset by toll hikes next year.
“The expected decline in FY16 earnings is cushioned by better contribution from its toll highways as there are scheduled toll hikes for the Damansara Puchong Highway and Shah Alam Expressway in 2016,” said TA Securities in a report.
Despite the challenging market environment, TA Securities expects Gamuda’s earnings to rebound in 2017.
“As the construction works for KVMRT Line 1 (MRT1) is tapering off and property sales for FY15 has slowed down, we expect to see earnings contraction in FY16 before rebounding in FY17 when works for KVMRT line 2 (MRT2) pick up momentum,” said TA Securities.
Another silver lining for Gamuda is its overseas property business, especially in the Vietnamese market.
“The domestic property market is expected to remain sluggish but stable. However, Vietnam’s property outlook appears promising. Gamuda is hopeful of maintaining the sales achieved last financial year at least, if not better. Vietnam property sales are projected to contribute about 40% to the group’s total property sales in FY16,” said TA Securities.
StockStalk: Construction is Gamuda’s core business with almost 70% of its revenue stream and this is the sector that most investors would look at to evaluate Gamuda’s potential growth.
Gamuda currently has an order book of about RM800 million. It is a big player in mega infrastructure projects such as the MRT and is bidding for more.
On the downside, FY16 is said to be somewhat of a transition period for Gamuda’s earnings given the fact that its involvement in the MRT1 project is at the tail-end stages.
On the other hand, a potential RM5 billion to RM6 billion worth of projects from MRT2, as well as the PTMP – both scheduled to be awarded in mid 2016 – could swing earnings momentum back in Gamuda’s favour next year and increase its order book by as much as sevenfold.
It is also said to be in good position to win a slice of the RM27 billion Pan Borneo Highway that could be awarded before the Sarawak elections in the middle of 2016.
The scheduled toll hikes in 2016 are expected to soften the blows of Gamuda’s weak performance in other sectors. There have been lower traffic volumes at Gamuda operated highways since the hikes this year.
Overall, Gamuda is still considered by many analysts as a good long-term pick in the construction sector, especially given its next expected earnings growth cycle in FY17, anchored by the RM28 billion MRT2 project.
Nevertheless, there are a few cautions for investors looking at Gamuda. First, the domestic property market remains sluggish and some analysts are suggesting that 2016 could be worse.
Second, uncertainties in the overall economy may have a domino effect on Gamuda’s fortunes. For example, the collapse in oil prices could force the Malaysian government to revise its expenditure.
On Dec 17, Minister in Prime Minister’s Department Wahid Omar said that the government would have to review Budget 2016 if oil prices continue to fall. Budget 2016 was based on the assumption of Brent crude price (a widely used benchmark) of US$48 per barrel. This week, it fell to an 11-year low of US$36.
Consequently, any cuts in infrastructure projects may have adverse effects on Gamuda’s order book replenishments and earnings catalysts.
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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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