Gamuda Bhd
(Aug 11, RM4.38)
Maintain neutral with an unchanged target price of RM4.83. Gamuda Bhd remains in the lead as an infrastructure construction company domestically for mass rapid transit (MRT) or light rail transit (LRT) tunnelling and engineering jobs. 

This is due to its expertise in geotechnics through the usage of variable density tunnel boring machines (VDTBM) designed to suit Malaysian geographical formation, avoidance of cost overruns in its projects through reducing karstic geohazards and efficient value engineering methodology for cost.

With a wealth of experiences in constructing MRT Line 1, Gamuda will have an added advantage to secure projects such as MRT Line 2, the Penang Transport Master plan (PTMP), and LRT3 due to its proven track records. Moreover, Gamuda possesses a strong balance sheet to undertake construction projects, thus it will not be facing serious obstacles for financing.

The project delivery partner (PDP) fees for MRT Line 2, PTMP and LRT3 are expected to be within the range of 4% to 6% of each project value.

Additionally, various packages are available for bidding such as elevated viaduct guideways, elevated station, and civil and structural engineering in the event that Gamuda is unable to secure the appointment as the PDP. 

It must also be noted that any potential contributions from the said projects will only be reflected in financial year 2017 (FY17) onwards.

Nonetheless, our recommendation is to take the opportunity to increase exposure in Gamuda should the share price dip further.

We remain sanguine about Gamuda’s technical capability in tunnelling due to the technological advancements and breakthroughs that the company has made especially with the VDTM.

This is due to the fact that it is the only company in the world that possesses the technology, as it is developed jointly by MMC-Gamuda and Herrenknecht GmBH (Herrenknecht AG).

The VDTM can reduce sinkholes which are prevalent in Malaysian as well as Asian geographical formation by injecting a slurry mould into the cavities of the rock formation.

For tunnel engineering, soil profile remains the most influencing aspect of construction cost. Sinkholes can incur additional cost for tunnelling and impact the bottom line.

This was experienced by MMC-Gamuda during the pre- and post-construction period of the Smart Tunnel.

The PTMP will be segmented into three parts namely the highway network which costs RM16.02 billion, strategic implementation costing RM805 million and public transport network, which includes bus rapid transit and trams costing RM9.63 billion.

The winning bidder will have the rights to reclaim two optional areas. They are 2,000 acres (809.37ha) in the southern part of Penang of which 600 acres will be used for the Penang International Airport and Free Trade Zone expansion, and land located between the Penang Bridge and the mouth of Sungai Pinang river.

We are of the opinion that the middle bank is not suitable due to state environmental legislation issues and reckon that the land near the Penang International Airport is much more viable commercially.

The key components of the PTMP PDP’s responsibilities are building a 17.5km LRT connecting Komtar building to the airport and a 20km link from Bayan Lepas to Tanjong Bungah.

Another criterion is that the tendering companies must have a minimum of RM3 billion in annual turnover and 15 years of experience. We remain upbeat on Gamuda’s capability to secure the project. — MIDF Research, Aug 11.

This article first appeared in digitaledge Daily, on August 12, 2015.