Gamuda Bhd
(March 11, RM2.82)
Maintain underperform at RM2.79, fair value is RM2.12: Gamuda is acquiring a 60% stake in Tan Thang Company (Tan Thang) from Sai Gon Thuong Tin Real Estate Joint Stock Company (Sacomreal) for US$82.8 million (RM273 million). Tan Thang holds the development rights for a piece of land measuring 204 acres (82.6ha) in Ho Chi Minh City, Vietnam.

Tan Thang has secured the key approvals from the authority to develop the land into a township with a total gross development value (GDV) of RM6 billion over seven years.

Having adjusted for an efficiency (sellable ratio) of 48%, the effective land cost is US$350 per sq metre that is at a premium to the going rate of US$250-US$300 in the area. However, the premium is justifiable by virtue of a higher-than-average plot ratio the land will command.

We feel that Gamuda is getting a much better deal as compared with Yenso Park as Gamuda only signed on the dotted line after key approvals for the project from the authority were secured.

We are positive on the latest development but we do not believe it is the re-rating catalyst the market is looking for. We believe investors still want to first see the “first oil” from Gamuda’s investment in Vietnam, that has so far still been elusive.

While a rosy picture for the construction sector has been priced in based on the current rich valuations, it is still far from being a reality, especially so after a slew of negative developments including the reduced gross development expenditure in 2010, dong’s devaluation, the Dubai credit crisis and the seemingly declining dominance of the big boys in large-scale projects.

We believe the market has under-appreciated two other key risks as well, namely: possible delays in project implementation and sub-par margins due to stiff competition.

Rich valuations have more than priced in Gamuda’s earnings buffer from its RM7.5 billion outstanding construction order book. Indicative fair value is RM2.12 based on 14 times CY10 earnings per share (EPS) of 15.1 sen, in line with our benchmark one-year forward target price-earnings ratio (PER) for the construction sector of 10-14 times. — RHB Research Institute, March 11


This article appeared in The Edge Financial Daily, March 12, 2010.