Stock Name: GAMUDA
Company Name: GAMUDA BHD
Research House: HWANGDBS
Construction sector
Gamuda remains our high-conviction 'buy' for most leverage to the mass rapid transit (MRT) project, but we also like MMC Corp Bhd as an alternative proxy. We raise our target price (TP) for Gamuda Bhd and MMC to RM5.25 and RM4.05, respectively, by removing the debt portion from our discounted cash flow (DCF) value for the MRT tunnelling works as the project is expected to be fully funded by the government now. We expect the RM14 billion tunnelling works to add RM1 per Gamuda share and 76 sen per MMC share based on our DCF value (50% win probability). Approximately 20% of the initial Sungai Buloh-Kajang line will be tunnelling works. In spite of the aborted merger, we like MRCB (raise TP to RM3.05) as we expect it to carve out the most lucrative portion of the 3,400-acre Rubber Research Institute Malaysia land ' the transport hub with commercial content, where the red and green lines will converge. We raise TPs for IJM Corp Bhd (TP RM7.50) and WCT Bhd (TP RM4.15) after imputing larger contract wins as both surprised on the upside in 2010.
This will be the year of project rollouts following a year of planning and tabling of the 10th Malaysia Plan (10MP) in 2010. The pump-priming story also ties in with expectations for a general election in 2011. With RM221 billion worth of contracts identified under the 10MP (RM100 billion transport-related), we envisage the government playing this quick-to-execute trump card to create the 'feel good factor' by aggressively dishing out new contracts. The MRT is a prime example ' it is expected to contribute RM8 billion to RM10 billion a year to gross national income based on 2.5 to 3.5 times multiplier effect and is vital to the economy of Greater KL.
The MRT project has received Cabinet approval with the MMC-Gamuda JV appointed project development partner ( PDP). Hence, work is likely to start on schedule by July 2011. Also, contractors with stronger track records and leaner cost structures will benefit as the PDP would want to ensure minimal execution risks. IJM and Sunway are strong contenders with their manufacturing arms, as is WCT with its lean cost structure and tested partnership with Gamuda. We do not foresee meaningful foreign participation due to time constraints, and the JV has the required expertise.
We are disappointed that IJM will not be able to capitalise on Malaysian Resources Corp Bhd's construction and concession assets. But there is still much to look forward to with the revival of the West Coast Expressway, private sector jobs and India infrastructure spending while its manufacturing arm is a prime beneficiary of the LRT, MRT and six new highways. The Sunway-SunCity merger will eventually have a RM3.6 billion market cap and larger balance sheet, enabling its construction business to be more competitive in overseas bids. And TRC Energy Bhd may be an ideal merger and acquisition target given its market cap/orderbook ratio of 0.2 times and 77 sen net cash per share. ' HwangDBS Vickers Research
This article appeared in The Edge Financial Daily, January 12, 2011.
Company Name: GAMUDA BHD
Research House: HWANGDBS
Construction sector
Gamuda remains our high-conviction 'buy' for most leverage to the mass rapid transit (MRT) project, but we also like MMC Corp Bhd as an alternative proxy. We raise our target price (TP) for Gamuda Bhd and MMC to RM5.25 and RM4.05, respectively, by removing the debt portion from our discounted cash flow (DCF) value for the MRT tunnelling works as the project is expected to be fully funded by the government now. We expect the RM14 billion tunnelling works to add RM1 per Gamuda share and 76 sen per MMC share based on our DCF value (50% win probability). Approximately 20% of the initial Sungai Buloh-Kajang line will be tunnelling works. In spite of the aborted merger, we like MRCB (raise TP to RM3.05) as we expect it to carve out the most lucrative portion of the 3,400-acre Rubber Research Institute Malaysia land ' the transport hub with commercial content, where the red and green lines will converge. We raise TPs for IJM Corp Bhd (TP RM7.50) and WCT Bhd (TP RM4.15) after imputing larger contract wins as both surprised on the upside in 2010.
This will be the year of project rollouts following a year of planning and tabling of the 10th Malaysia Plan (10MP) in 2010. The pump-priming story also ties in with expectations for a general election in 2011. With RM221 billion worth of contracts identified under the 10MP (RM100 billion transport-related), we envisage the government playing this quick-to-execute trump card to create the 'feel good factor' by aggressively dishing out new contracts. The MRT is a prime example ' it is expected to contribute RM8 billion to RM10 billion a year to gross national income based on 2.5 to 3.5 times multiplier effect and is vital to the economy of Greater KL.
The MRT project has received Cabinet approval with the MMC-Gamuda JV appointed project development partner ( PDP). Hence, work is likely to start on schedule by July 2011. Also, contractors with stronger track records and leaner cost structures will benefit as the PDP would want to ensure minimal execution risks. IJM and Sunway are strong contenders with their manufacturing arms, as is WCT with its lean cost structure and tested partnership with Gamuda. We do not foresee meaningful foreign participation due to time constraints, and the JV has the required expertise.
We are disappointed that IJM will not be able to capitalise on Malaysian Resources Corp Bhd's construction and concession assets. But there is still much to look forward to with the revival of the West Coast Expressway, private sector jobs and India infrastructure spending while its manufacturing arm is a prime beneficiary of the LRT, MRT and six new highways. The Sunway-SunCity merger will eventually have a RM3.6 billion market cap and larger balance sheet, enabling its construction business to be more competitive in overseas bids. And TRC Energy Bhd may be an ideal merger and acquisition target given its market cap/orderbook ratio of 0.2 times and 77 sen net cash per share. ' HwangDBS Vickers Research
This article appeared in The Edge Financial Daily, January 12, 2011.
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