Political concern waning on Gamuda?

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KUALA LUMPUR: Gamuda Bhd’s share price marched from a low of RM3.64 to a two-year high of RM4.14 last Thursday. The rally on the construction outfit, deemed as a high political risk company, raised eyebrows considering that the 13th general election (GE13) is around the corner.

JP Morgan’s latest report upgraded the Malaysian equity market to an “overweight” rating and one of the stocks it recommended to investors was Gamuda.

“Our Malaysia domestic nine offer a strong franchise, domestic-led earnings growth and dividend support, with the potential for earnings and dividend upgrades,” said JP Morgan while pointing out that the nation’s Economic Transformation Programme has helped fuel Malaysia’s capital expenditure to grow 20% last year compared with a five-year average of 7%.

The renewed buying interest in Gamuda, which once fell out of favour amid concerns about its prospects of getting new jobs after GE13, indicates that some investors with bigger risk appetites might have overcome election fears and have started seeing value in the construction stock.

In a note last Friday, MIDF Research said Gamuda was one of the quality stocks that were actually less vulnerable to political risks. “We believe investors have started to appreciate Gamuda’s fundamentals and have imputed less election risk,” said the research house.

RHB Research in its latest note said investors should stand by in wetsuits, ready to take the plunge and dive for value if the announcement of the dissolution of Parliament (anytime now) does trigger a heavy selldown on construction stocks.

“After the general election, when the dust settles, over a longer investment horizon, we believe investors should refocus on sector fundamentals that are reasonably attractive underpinned by a construction upcycle backed by various large-scale infrastructure, property and oil & gas projects driven by the government, government-linked companies/agencies, national oil company Petronas and the private sector.”

RHB Research has maintained its “buy” call on the stock with a fair value of RM4.49.

The stock is up 13% year-to-date (YTD) and has largely priced in near-term positives from the potential sale of concession assets and its strong set of results.

The research firm sees Gamuda as the best proxy to public-infrastructure spending, as it believes that the SBK MRT line project has gone beyond “the point of no return”.

The release of Gamuda’s second quarter (2Q) results also added momentum to the share price rally.

Gamuda’s net profit grew 15% to RM156.9 million, or 14.51 sen per share, for the 2Q ended Jan 31, from RM136.5 million or 13.01 sen per share, in the previous corresponding quarter. Its revenue increased nearly 14% to RM875.2 million from RM768.3 million a year ago.

The group said higher work progress from the Klang Valley Mass Rapid Transit Project (KVMRT) had contributed to its increase in net profit.

Commenting on its outlook for the group, Gamuda said it expected to perform better this year supported by on-going construction projects, strong unbilled sales from its property division and steady earnings from its water and expressway concessions division. The latest set of figures was by far Gamuda’s strongest quarterly performance.

Affin Research expects Gamuda to see its third consecutive record earnings year.

Foreign shareholdings has increased from 37% in December last year to about 43% in February 2013 — indicative of greater foreign interests but possibly making the stock price more vulnerable to external volatilities, according to Affin Research.

Gamuda’s outstanding construction order book currently stands at RM4.2 billion, which is made up of RM3.7 billion in KVMRT underground works (50% share) and RM500,000 in double tracking works (50% share).

“The group is looking at potentially securing RM10 billion worth of new jobs over the next two years, largely coming from the MRT,” said CIMB Research in its result review.

According to CIMB Research, Gamuda is also positioning itself to submit a proposal for the RM30 billion KL-Singapore high-speed rail (HSR) project and it sees an opportunity in the building of the JB-Singapore rail transit system (RTS) if the crossing to Singapore involves an underground tunnel.

However, CIMB Research said Gamuda’s management did not seem bullish on those projects as it was too early in the game. Separately, the decision on tenders for the RM8 billion Gemas-JB double tracking project is likely to be made in 2H13.

Despite the positive outlook, Gamuda received a not-so-flattering report from Maybank IB Research, which downgraded the stock to “hold” from “buy” with unchanged target price of RM4.10.

“With the government’s decision on the KVMRT 2 looking likely only after GE13, we now expect news-flow relating to Project Delivery Partner (PDP) appointment and tendering to filter through only from end-2013 or early-2014,” said Maybank IB.

It added: “After gaining 13.5% YTD, Gamuda now trades at 13.5 times FY14 PER, not excessive but fair, in our view, for its existing business. A re-rating to our target price will come from major job wins post GE13. For now, we rate the stock a ‘hold’,” said Maybank IB.

“Gamuda maintained its FY13 local property sales target of RM1.35 billion as the property market in the Klang Valley appears to be stable while the property market in Johor still remains buoyant,” it said.

Public Investment Bank also downgraded Gamuda from “outperform” to “neutral” noting that after its recent strong price performance, the stock was nearing its target price of RM4.26 based on a sum-of-the-parts valuation.

“Granted, job flows for Gamuda should be good considering the planned rail spending, but we opine the risk-reward is not as compelling now,” it said.

This article first appeared in The Edge Financial Daily, on April 1 2013.

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