Gamuda’s outlook still cloudy despite winning Singapore land bid

Land purchase unlikely to help make up shortfall caused by slowdown in local construction industry

By NG MIN SHEN / Pic By TMR File

GAMUDA Bhd’s near- to mid-term outlook remains cloudy despite its recent successful land bid in Singapore, as the current state of its construction and toll concession segments continues to overshadow its property business.

Hong Leong Investment Bank Bhd analyst Yip Kah Ming said the land purchase is unlikely to help make up the shortfall caused by the slowdown in the local construction industry.

He said the company’s profit is still dependent on big construction contracts and toll concessions.

“A bigger near-term catalyst for Gamuda would be the Penang Transport Master Plan — that’s quite substantial and will help make up the shortfall.

“The land purchase is normal for their property business. They already have projects in Singapore and Vietnam, plus the Malaysian property market is currently weak, so it’s not a surprise that they’re diversifying away from Malaysia.

“Their margins from overseas property projects are pretty decent,” Yip told The Malaysian Reserve.

The construction and engineering group on Tuesday told Bursa Malaysia that its wholly owned subsidiary Gamuda (Singapore) Pte Ltd, together with its joint-venture partner Evia Real Estate (7) Pte Ltd, had won a land tender from the Housing and Development Board of Singapore (HDB).

The S$318.9 million (RM963 million) tender was for a land parcel measuring 51,411.9 sq m at Anchorvale Crescent, which will be developed into an executive condominium (EC).

Kenanga Investment Bank Bhd (Kenanga IB) in a note yesterday viewed the landbank replenishment as neutral due to its minimal impact on property revalued net asset value, thus maintaining its ‘Outperform’ call on the construction group.

However, Kenanga IB has a positive long-term view on Gamuda’s move into the executive condominium space in Singapore as “the demand for EC tends to be more resilient as it falls under the HDB scheme”.

The research firm estimates the gross development value of the project to be around S$600 million, premised on an average selling price of S$1,400 per sq ft on total net developable space of 415,044 sq ft (38,558.85 sq m). The project is expected to be launched in 2020 at the earliest.

“There are no changes to our earnings forecast for financial years ending July 31, 2018 (FY18), to FY19, as we only expect contributions from the development to kick in earliest by FY24 as the recognition for EC projects is based on completion method,” Kenanga IB stated.

Meanwhile, on Aug 27, Gamuda via its 80%-held unit Gamuda Water Sdn Bhd accepted Pengurusan Air Selangor Sdn Bhd’s (Air Selangor) offer to acquire Syarikat Pengeluar Air Selangor Holdings Bhd (Splash). Gamuda holds 40% of Splash’s parent, Splash Holdings (Syarikat Pengeluar Air Selangor Holdings Bhd).

Air Selangor, which is wholly owned by the Selangor state government, had earlier offered RM2.55 billion to take over Splash, which is the concession holder of the Sungai Selangor Water Treatment Plant Phase 1 (SSP1) and SSP3, and thus controls about 45% of treated water supply in Selangor, Kuala Lumpur and Putrajaya.

Both Gamuda Water and and Taliworks Corp Bhd’s subsidiary Sungai Harmoni Sdn Bhd, also received offers from Air Selangor to remain as operators and to undertake maintenance works for the two facilities. Yip said overall, the water consolidation exercise is good for all players.

“The Splash sale is neutral for Gamuda — it’s a 30% discount to book value and they’ll lose the recurring income from Splash, but the disposal will also help them generate funds required for the Penang Transport Master Plan project.

“The operations and maintenance contract is definitely positive for Gamuda as the reduction in bulk water supply rates is not as great as expected, and they’ll get to recoup the receivables claimed by Gamuda Water,” he said.

The bulk of Gamuda’s earnings is derived from its construction and toll concession segments.

Over the years, the group — along with other construction players — has blossomed under the government’s emphasis on infrastructure development, with Gamuda focusing largely on railways due to its tunnelling expertise.

However, the new Pakatan Harapan government has either cancelled or delayed several mega infrastructure projects since winning the 14th General Election (GE14), causing an overhang in the once booming construction sector.

It may also make good on its promise to abolish tolls, although Finance Minister Lim Guan Eng has said this won’t be done until the country’s fiscal situation improves.

As a result, Gamuda’s shares have plunged 18.8% since May 14 — the first trading day after GE14. The stock has also tumbled 30.2% since the start of the year, when it used to hover around the RM5 mark.

It closed unchanged at RM3.42 yesterday for a market capitalisation of RM8.44 billion with 2.98 million shares traded.

Kenanga IB believes Gamuda can weather the short-term uncertainty in job prospects, “given that they are the leader in the construction industry in Malaysia coupled with the resolution of the Splash issue”, while Yip thinks the recovery will only happen in 2019.

“It’s hard for them to recover to RM5 in the near term because they aim mostly for the mega projects that will need some time to be revived.

“The government is likely to dish out smaller construction contracts for now, like hospitals and rural development. But it definitely will implement some construction projects to drive the economy, perhaps next year,” he said.