This article first appeared in The Edge Financial Daily, on February 17, 2016.

Gamuda Bhd
(Feb 16, RM4.37)
Maintain buy with a revised target price (TP) of RM5.59: Gamuda Bhd’s rights issue of warrants on the basis of one warrant for every six shares held will be closed from subscription on Feb 26. The warrant rights (Gamuda-WR) are trading  from Monday to Friday this week.

Based on our fair value of RM1.56 for the warrants, the implied fair value for Gamuda-WR is RM1.31, after deducting the warrant issue price of 25 sen. Hence, the closing price of Gamuda-WR on the first day of trading at 30 sen was attractive.

We recommend shareholders to subscribe to the rights issue of Gamuda warrants to be issued at a discount to the theoretical value.

Even at the current implied warrant price of 55 sen (Gamuda-WR price plus issue price), buying the warrants to exercise for the shares at an implied cost of RM4.60 is only at a 4.5% premium to its current share price of RM4.40.

The warrants provide a geared exposure to the stock (implied warrant gearing of eight times).

We remain positive on Gamuda’s long-term prospects, as we believe the MMC Corp Bhd-Gamuda joint venture is in a strong position to win the current tender for the underground portion of the Klang Valley Mass Rapid Transit Line 2 project worth about RM12 billion, expected to be awarded in mid-2016. We gather that the Gamuda-Naim Holdings Bhd joint venture is also in a strong position to win the first package of the Pan-Borneo Highway (Sarawak section) worth over RM1 billion expected to be awarded in the first quarter of 2016.

We see Gamuda as a core holding for exposure to the Malaysian construction and infrastructure sector. 

Key risks to our call are weak property sales and implementation delays in new infrastructure projects. — Affin Hwang Capital, Feb 16