KUALA LUMPUR (March 26): Gamuda Bhd slipped to a low of RM3.47 on profit taking after rising as much as 30 sen or 8.11% to RM4 this morning, after the group announced it is undertaking the development of Island A under the Penang Transportation Master Plan (PTMP).

At midday break, Gamuda was down 4.32% or 16 sen to RM3.54. valuing it at RM8.89 billion. It earlier fell as much as 23 sen or 6.22% to RM3.47. 

Analysts generally are positive on the plan as it provides long-term earnings visibility to the group. However, some raised concerns on the change of the project business model in which the group needs to bear all the financial risks of the project.

AmInvestment Bank Research said in a note today it was taken aback by Gamuda’s decision to put its balance sheet behind Island A.

“On one hand, this enables the Penang South Island project and the greater PTMP project to finally get off the ground and the immediate realisation of RM5 billion orderbook for Gamuda. On the other hand, Gamuda is effectively sailing into uncharted waters by placing a RM6 billion to RM7 billion bet on reclaimed land in Penang Island (which is very significant as compared with Gamuda’s market value of RM9.2 billion currently),” it said.

“An investor who bought into Gamuda for its highly cash-generative contracting, water and toll road businesses, could wake up owning a company that is poised for significant cash outflows over a prolonged period of time, i.e. at least four years, before the first land sale could be concluded.

“Gamuda’s risk-return profile is materially altered. We are unsure if balance sheet-driven job wins are the way forward in the local construction industry but we believe they are certainly a tell-tale sign of a tough market ahead for players,” it said.

The research house, which maintained a "hold" call on the stock, raised Gamuda FY22 and FY23 net profit forecasts by 6% and 18% respectively, but cut its fair value on the stock by 15% to RM3.25, from RM3.81.

Meanwhile, TA Securities’ analyst Ooi Beng Hooi said that unlike the previous arrangement, Gamuda needs to fully fund all equity capital required and arrange for the necessary borrowings required, with funding deficit estimated to peak at RM4 billion.

However, he is still positive on the joint venture in the project development of Island A, which has an estimated land area of 2,300 acres, as it provides long-term earnings visibility to Gamuda through Phase 1 reclamation works which will be awarded to Gamuda as well as through project development.

“Phase 1 reclamation is expected to take six years. The total land sale revenue is estimated between RM8 billion to RM9 billion to be progressively recognised from the fourth year after reclamation starts, while the turnkey contract is estimated at RM6 billion to RM7 billion, mainly the reclamation cost forecasted at RM4 billion to RM5 billion,” he said.

Besides, Gamuda’s net gearing stood at 27.7% as of end-October 2020. Supported by steady cashflow from its concessions, Ooi said, the net gearing is expected to stay below 70% even at the peak of funding deficit, as such, the management alluded that equity cash call is not necessary.

Ooi maintained TA Securities’ earnings forecasts on the group as he has previously factored in the reclamation work in his earnings model. He also maintained his "sell" call on the stock with an unchanged target price of RM3.34.

RHB Research Institute’s analysts Muhammad Danial Abd Razak and Eddy Do Wey Qing said the longer-term prospects for Gamuda look favourable, as future works for the PTMP over the next 10 years will open up more orderbook opportunities.

“Gamuda Engineering will be the turnkey contractor (TC), after being awarded with Phase 1 reclamation works. Other related works shall be tendered out by the TC. Immediate orderbook value for the initial reclamation works is about RM5 billion.

“Works are expected to commence by 2Q21, hence earnings are expected to kick in by this year, albeit minimal. Higher contributions from this are likely to be seen in FY22,” they said.

They maintained a "buy" call on Gamuda and revised up its target price to RM4.35 from RM4.25.

“The target price was arrived after adding RM5 billion of new orders, which effectively enhance Gamuda’s outstanding orders to about RM10 billion,” they said.