Gamuda Bhd - Maintain outperform with higher target price RM4.96

Gamuda's FY7/10 core net profit made up 91% of our full-year forecast and 83% of consensus. Despite an improved earnings before interest and tax (Ebit) margin, which anchored the 45% year-on-year (y-o-y) growth in net profit, the results were below expectations as we had overestimated associates' contributions. We cut our FY2011/12 forecasts by 4% to 6% and introduce our FY2013 numbers.

This, plus the effects of rolling forward our valuation horizon to end-2011 and applying our revised 13.8 times target market PER (15 times previously) to our construction profit component raises our RNAV-based target price from RM4.78 to RM4.96.

We reiterate our 'outperform' call with main potential re-rating catalysts being more progress and eventual approval of the MRT project. The stock remains one of our top picks for the sector.

FY2010 revenue dipped 10% y-o-y, mainly due to depleting construction jobs and despite strong property sales of RM820 million, surpassing the targeted RM800 million. However, Ebit surged 49% y-o-y while Ebit margin expanded almost two percentage points to 8.9%, boosted by all segments. At the pre-tax profit level, the construction division chalked up a y-o-y doubling of pre-tax profit and contributed 21% of group pre-tax profit. Construction pre-tax margins stood at 4.5%, and are likely to further improve in the coming quarters. Pre-tax profit from the property, expressways, and water segments grew by 15% to 28% y-o-y and accounted for 78% of group pre-tax profit. Overall core net profit grew by 45% y-o-y. No dividends were declared, which was no surprise.

During the results briefing, management sounded more optimistic about the progress of the MRT proposal, reinforced by the key deliverables of the Economic Transformation Programme (ETP). The MRT proposal is still at the consultants' evaluation stage, which is expected to be completed by end-September. Management expects more details to be unveiled during the tabling of Budget 2011 on Oct 15, with likely Cabinet approval before end-2010. Clinching the RM13 billion to RM14 billion tunnelling works would bump up the current RM6 billion outstanding order book to over RM12 billion. ' CIMB Research, Sept 29.

This article appeared in The Edge Financial Daily, September 30, 2010.