Gamuda Bhd (March 15, RM3.68) Downgrade to hold at RM3.71 with target price RM3.99: According to Prasarana, the infrastructure cost for the first radial line is estimated at RM18 billion which suggests the total cost of the MRT project could reach RM54 billion compared with earlier estimate of RM36.6 billion. Works for the elevated portions of the first line remain on track to start in July. We understand that the government is working towards finalisation of the entire network for approval by the end of CY11. Depending on the finalisation progress of the entire MRT network, contracts for the tunnelling portions could either be awarded line-by-line or as a whole package in late 2011 or early 2012.

The recent rounds of dong devaluation have raised concerns about the group’s exposure to the Vietnam property market. There may be impairment to the group’s investment in Vietnam which will hit the balance sheet but not the income statement. Housing affordability may be an issue going forward but this is mitigated by our understanding that a large majority of property buyers do not rely on borrowings to finance their purchase, opting instead to settle in cash. Furthermore, properties are viewed as a natural hedge in an environment of rising inflation and falling currency.

For the investor who remains concerned about macroeconomic conditions in Vietnam, a worst-case scenario where no contributions from the group’s property projects in Vietnam are factored in would see FY11/FY13 earnings decline by 2.2% to 20%. On the other hand, FY11/FY13 earnings may be raised by 7.1% to 15.8% due to margin recovery from the double track project. That said, management may again choose to be conservative as building material prices are trending upwards again.


We cut our FY11 earnings by 1% in FY11 but raise FY12 earnings by 7.8% to account for later than expected award of tunnelling works as well as the revised launch schedule of Gamuda City. As the award of the tunnelling works for the MRT is only expected in early 2012, we expect a period of lull in news flow for Gamuda. Furthermore, concerns about further dong devaluation hang in the balance. As such, we are downgrading Gamuda from a “trading buy” to a “hold” by pegging CY11 earnings per share to historical average price-earnings ratio of 19.5 times instead of 25 times (one times standard deviation above average). Re-rating catalysts include: (i) margin recovery from double track project; (ii) award of the tunnelling works for all three lines instead of one; and (iii) stronger than expected property sales in Vietnam. — ECM LibraResearch