ALTHOUGH Gamuda Bhd's revenue rose 23% year-on-year (y-o-y) in the first half of its fiscal year ending July 31, 2009 (1HFY09), research houses were disappointed by the 42% y-o-y contraction in the construction giant's net profit.

Gamuda's 1H09 earnings accounted for 38% of consensus full-year estimate, prompting research houses to cut their earnings forecast for the construction group.

"In light of the disappointing results, we further cut our FY09 to FY10 earnings by 3.3% to 7.5%, while FY11 remain unchanged," said OSK Research in a note.

OSK said consensus was likely to pare their estimates by a larger quantum given their relatively higher magnitude of disappointment.

"Since our numbers were pretty much in line all the way to the Ebit (earnings before interest and tax) level, our earnings reduction is mainly centred on higher projected finance cost and lower contributions from its associates," it said.

The research house forecast Gamuda's earnings to contract by 32% in FY09 from 27% previously.

Maybank Investment Bank (Maybank IB) meanwhile reduced Gamuda's FY09 net profit forecast by 20%. The construction firm's 1H09 net profit of RM104 million accounted for 44% of the research house's full-year estimates.

"Property development also disappointed, with slower progress billings (which declined 3% quarter-on-quarter and 12% y-o-y) and lower pre-tax margin of 17.4% (which decreased 7.7% y-o-y) amid a soft market since FY08 and changes in product mix," it said.

Nevertheless, Maybank IB said the consolation against the disappointing results was the steady earnings support from the water and expressways concessions, which contributed 60% to Gamuda's pre-tax earnings.

OSK reduced its target price for Gamuda slightly to RM1.38 from RM1.41, implying a price-to-book value of 0.9 times, which was equivalent to the construction firm's trough valuations since 2000. "We believe this is warranted given its contracting earnings and poor visibility, uncertainty in its property development in Vietnam, and unlikely positive spillovers from the recently announced second stimulus plan," it said.

OSK maintained a sell on Gamuda, and said for construction exposure, it preferred IJM Corporation Bhd, for which it pegged a buy recommendation with a target price of RM4.69.

It was worth noting that Gamuda's foreign shareholding had declined 2% month-on-month (m-o-m), it said. It stood at 43% as at end-February 2009.

Maybank IB said although Gamuda's upside might be capped by lacklustre results and downgrades of consensus' high earnings forecasts, its share price downside was limited by a strong asset base to support earnings.

"The downside is limited by its water and expressway businesses, which would continue to provide resilient earnings," said the research house.

Maintaining a hold on Gamuda, it pegged the construction firm's target price at RM2 based on a 20% discount to its revised net asset value (RNAV) of RM2.45 a share.

ECM Libra had also reduced its earnings estimates for FY09 to FY11 by 0.5% to 11.0%. "We are also downgrading our call to sell as we believe there are no clear catalysts in sight while the ongoing water consolidation adds further uncertainty to Gamuda's valuation," it said.

The research house's sum-of-parts derived target price had been revised downwards to RM1.52 from RM2.28.

Gamuda added two sen to close at RM2.05 last Friday.