Gamuda - Tunnel largely in the bag Hold

Stock Name: GAMUDA
Company Name: GAMUDA BHD

Research House: AMMB

Price Call: HOLD

Target Price: 3.72

- We maintain our HOLD recommendation on Gamuda with a revisedfair value of RM3.72/share ' pegging the stock at an unchanged 5% discount toits Sum-Of-Parts value. This is to account for (i) higher margin assumptionsassumed for its construction division; and (ii) Recent increase in our fairvalue accorded to its 45%-owned toll associate, Litrak Holdings (fromRM3.77/share to RM3.90/share).

- Quoting a statement from MRT Corp, the local press reportedat noon-time today that the MMC-Gamuda JV has emerged as the winner of thetunnelling contract under the Sg.Buloh-Kajang (SBK) MRT project. The contractvalue is estimated at RM8.2bil, and makes up circa 30%-40% of the overall SBKline project cost. Construction works are scheduled to be completed byend-2016.  

- Prior to this, the MMC-Gamuda JV was among five parties thathad earlier been pre-qualified for the tunnelling package. The other tendererswere the Hyundai-GadangChengal Jaya JV, Taisei Corp, Sinohydro Group Ltd and ChinaRailway Group Ltd.

- The MRT Corp statement added that the MMC-Gamuda JV waschosen based on two important criterion: (i) The JV possessed the expertise andexperience of undertaking similar works during the construction of theStormwater Management and Road Tunnel (SMART) project; and (ii) It offered thebest bid that was some 3.4% lower than the second-lowest offeror.

- We are not surprised by this latest news. We had earlier highlightedthat the MMC-Gamuda JV was the front-runner for the SBK tunnelling job due toits status as the only wholly-owned local outfit that was pre-qualified, withthe necessary pre-requisite in major tunnelling works. Furthermore, the JV hadbeen given a 7.5% pricing advantage under the 'Swiss Challenge' method.

- But, our HOLD call on Gamuda remains. We reckon that marketexpectations of its chances in the MRT project have largely been built-in atcurrent levels. 

- Flipside, the RM8bil Gemas-JB double tracking project appearsto be the only fresh near-term catalyst for Gamuda. It is among threelocal-Chinese partnerships that have reportedly been pre-qualified for thisjob, where a decision could be known by mid-2012.  

- For leverage to the large-cap construction space, weprefer IJM Corp and WCT for the latter duo's more exciting new contractpipeline going forward. Likewise, we like suppliers of building materials fordirect exposure to the Klang Valley MRT project:- i.e. Lafarge Malayan Cement, AnnJoo Resources and Lion Industries.   

Source: AmeSecurities