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Double good news could be on the cards for Gamuda. Firstly, the government is set to proceed with the plan to buy over its four highways, potentially bringing in proceeds of RM2.36b (or 95.0 sen/share) for Gamuda to reward its shareholders. Secondly, it remains on track to sign the PDP agreement for the PTMP in the coming weeks, which will open up a new source of income stream. Based on the latest developments and pencilling in fresh assumptions, we have: (i) adjusted our FY20/21 CNP projections by +3% and -8%; and (ii) raised our SoP-derived TP to RM4.70 as well as upgrading our call to OUTPERFORM.

The coast is clear for sale of highways. The government’s decision to retain the ownership of PLUS (51%:49% owned by Khazanah:EPF) – instead of divesting the expressway concessionaire to a private entity – is a positive for Gamuda. In particular, the government’s stance to keep PLUS will be seen as consistent with its previously announced plan to take over the four highways held by Gamuda. This could pave the way for Gamuda to sign the definitive agreements with the government by the 29 Feb 2020 deadline.

Staggered special dividends? Based on Gamuda’s share of an equity value of RM2.36b, which may be tweaked using a pricing formula that will be based on a future cut-off date, the proposed sale of its highways works out to be 95.0 sen per share. Assuming the deal is sealed by end-Feb, and approvals from shareholders and bondholders are in hand by 2QCY20, the sale proceeds may come in by 3QCY20. Following which, Gamuda could reward its shareholders with special dividends to be paid out before year-end. A guesstimate of special dividends of 32.0-48.0 sen per share – based on a payout range of one-third to half of the sales proceeds – imply current yields of 8%- 12%. There is also a possibility that the special dividends may be spread over two to three financial years to lock in shareholders for the medium term.

PTMP kicking off soon. We gather Gamuda (via its 60%-owned SRS Consortium) is still on track to sign the PDP agreement in the coming weeks to implement the Penang Transport Master Plan (PTMP), which will consist of three key components, namely the RM8.4b LRT, the RM7.5b PIL 1 highway and the RM8b Penang South Islands (PSI) reclamation. According to the Penang Chief Minister as quoted in a media interview; (i) the LRT project design works would begin in 1QCY20 with tenders to be called in 2Q/3Q CY20 and the first work package contract to be awarded in 3Q/4Q CY20, (ii) the detailed design of PSI would start in 1QCY20 while tenders would be called in 2QCY20 and contract awards to start to be dished out in 3Q/4Q CY20, and (iii) the PIL1 design would be obtained by 2QCY20 with tender calls in 4QCY20 and tender awards to be out by 1QCY21. In terms of funding, the LRT will be financed by state government bonds (and guaranteed by federal government), the PSI may be self-funded first by appointed contractors (before they are reimbursed using the proceeds from land sale) while the PIL 1 financing is still under deliberations.

Earnings revisions. After revisiting our progress billings and margin assumptions, as well as omitting the highway earnings contribution (of c. RM200m) in FY21, our revised CNP forecasts stand at RM602m (+3%) for FY20 and RM485m (-8%) for FY21.

SoP-derived TP is RM4.70 (from RM3.90). The valuation lift is chiefly attributable to the incremental contribution from PTMP (see table overleaf)) and the removal of holding company discount (to take into account the impending exclusion of the listed Litrak from our SoP computation post the highway deal). With a 15% potential upside, we are upgrading our call from MARKET PERFORM to OUTPERFORM

Source: Kenanga Research - 20 Jan 2020

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