Gamuda - A good re-entry point

Target RM5.66 (Long Term: Out Perform)

From our recent meeting with the management, we conclude that the next several months offer a good re-rating window for the stock. Gamuda stands out despite the MRT delay headwinds. The monetisation of the water assets can lead to special dividends. Even if Gamuda does not get any new projects beyond the MRT, the risk of an EPS decline is low and may only start from FY16. We think Gamuda will secure new projects. We raise our target price as we roll over our valuation to end-2014 (still pegged to a 10% RNAV discount). The restructuring of water assets, Budget 2014 and MRT newsflow are the key catalysts. It remains an Outperform and our top pick.

What Happened 

We recently hosted a small meeting with six fund managers. Gamuda was represented by Senior Group GM of IR, Clarence Boudville. Many questions were asked on the status of the MRT 2 & 3. The recent RM160bn budget for the rail works stated by PM Najib Razak in a press article reassures that the project is on. In the coming months, the official project approval and appointment of the project development partner (PDP) need to happen. The government's project sequencing move means that there is now a delay of 6-12 months in the MRT 2 project and this presents a risk to Gamuda's EPS from FY16, especially if it does not get new jobs. The group is banking on securing the RM8bn Gemas-JB double-tracking project. The KL-Singapore HSR is another possibility but is still in an early stage. The prospect of winning the RM1.2bn Langat 2 WTP is not so promising now, but the possibility of closing the water deal in Selangor in 2H13 is high. This could lead to special dividends in FY14 (30-35 sen/share). 

What We Think 

The meeting confirmed the possibility of a delay in the MRT 2 project, but also reassured that the implementation schedule is still manageable. We left the meeting feeling more positive about the sector developments in 2H - Budget 2014, MRT approvals, and the conclusion of the water deals in Selangor. Gamuda will be a direct beneficiary of these developments. 

What You Should Do 

Accumulate ahead of the budget in Oct. The recent weakness has priced in the "project sequencing" risks. The likelihood of over 9% dividend yield in FY14 is another positive.