Gamuda 3QFY13 results review positive momentum continues 3QFY13 results were ahead of expectations, with positive momentum in both construction and property divisions. We expect a positive share price reaction. Gamuda is one of our Domestic Nine picks, leveraged to robust government infrastructure spending. Please refer to our Malaysia Strategy note Momentum is with domestic growth. Near term catalyst: award of PDP role for MRT Line 2 (we estimate Gamuda's share at M$8B) Beat expectations. 9MFY13 core net profit of M$487MM is 82.2% of full year forecast and 78.6% of consensus. 4Q likely to be strong, implying FY13 beat. 50% core net profit growth in 1QFY13. M$113MM one-off provision for Smart Tunnel and Dukhan Highway arbitration loss as expected. Construction margins improved. Construction margins improved to 13.5% in 3QFY13, from 11.2% in 2QFY13, reflecting higher MRT Line 1 tunneling recognition. Tunneling works at 14% completion in 3Q and 8% for PDP role. MRT Line 2 is a major catalyst. Management is hopeful for cabinet approval for MRT Line 2 in 3Q CY2013 followed by PDP role award. This is a major catalyst for the stock, in our view. Management is hopeful of the role awarded to MMC-Gamuda j/v, given solid execution and complexity of project interface. The j/v has first mover advantage in our view. Estimated cost of M$24.9B (based on Line 1 costing, excluding Putrajaya link). First award to contractors probably in early 2015, consistent with timeline of MRT Line 1. Tunneling costing more than M$9B will be under international tender, likely to be under "swiss challenge". The MMC- Gamuda j/v would have a competitive advantage as the 10 tunnel boring machines for MRT Line 1 can be redeployed. Upbeat on potential sale of water concession. Management is now more upbeat on the potential sale of water concession asset post general elections, worth M$0.58/share on our estimates. If this happens we see a likelihood of a special dividend. Meanwhile, Gamuda is still in talks on the potential sale of expressways, but water asset sale could take place first. Overweight GAMU.KL, GAM MK Price: M$4.56 Price Target: M$6.00 Malaysia Construction Hoy Kit Mak AC JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X) Karen Li, CFA (852) 2800-8589 karen.yy.li@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Price Performance 5.0 4.5 M$ 4.0 3.5 3.0 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 GAMU.KL share price (M$) FBMKLCI (rebased) YTD 1m 3m 12m Abs 26.4% -5.5% 11.1% 33.7% Rel 21.8% -4.6% 6.1% 24.4% Gamuda Berhad (Reuters: GAMU.KL, Bloomberg: GAM MK) M$ in mn, year-end Jul FY11A FY12A FY13E FY14E FY15E Revenue (M$ mn) 2,673 3,087 2,949 4,194 6,468 Net Profit (M$ mn) 425 547 472 724 1,116 EPS (M$) 0.21 0.27 0.23 0.35 0.54 DPS (M$) 0.08 0.08 0.09 0.11 0.14 Revenue Growth (%) 8.9% 15.5% -4.5% 42.2% 54.2% EPS growth (%) 29.3% 28.7% -13.7% 53.3% 54.2% ROCE 8.9% 10.1% 4.9% 9.1% 14.9% ROE 11.9% 14.2% 11.3% 15.8% 21.3% P/E 22.1 17.2 19.9 13.0 8.4 P/BV 2.6 2.3 2.2 1.9 1.7 EV/EBITDA 11.8 10.5 13.4 6.1 1.9 Dividend Yield 1.8% 1.8% 2.0% 2.4% 3.1% Source: Company data, Bloomberg, J.P. Morgan estimates. Company Data Shares O/S (mn) 2,246 Market Cap (M$ mn) 10,192 Market Cap ($ mn) 3,236 Price (M$) 4.56 Date Of Price 27 Jun 13 Free float (%) 72.1% 3-mth trading value (M$ mn) 24.1 3-mth trading value ($ mn) 7.6 3-mth trading volume (mn) 24.6 FBMKLCI 1,741 Exchange Rate 3.15 Fiscal Year End Jul See page 8 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Company Description Gamuda's core business is its engineering and construction division, with capable heavy engineering skillsets, particularly in tunnelling. Other businesses include toll concessions - KESAS, LITRAK, SPRINT, and India s Durgapur and Panagarh Palsit Highway. Also owns water concession SPLASH (and water O&M company, Gamuda Water). Established township developments in Malaysia, making inroads into Vietnam. Revenue breakdown (FY12) 31% 38% P&L sensitivity metrics FY14 EPS impact (%) Impact of each M$1B increase in new construction orders 2.1% (Base case: Zero in FY13, M$8B in FY14) Impact of each 1 ppt increase in construction PBT margin 2.6% (Base case: 8% including PDP role) Impact of each M$1B increase in new property sales 3.3% (Base case: M$1.2B each in FY13 and FY14) Impact of each 1 ppt increase in property PBT margin 3.6% (Base case: 27.1% in FY14) Source: J.P. Morgan estimates Price target and valuation analysis Our Dec13 SoTP-based PT of M$6.00 assumes 18x P/E on CY14 construction earnings, in line with historical average. Property division is valued based on18x P/E on CY14 property earnings, in line with implied sector average target P/E. Gamuda s 45.8% stake in highway concessionaire Litrak (LTK MK) is marked-tomarket at M$4.40/share. Other concessions are valued based on DCF at WACC of 9%, while its Indian toll concessions are based on WACC of 15.4%. Value (M$ MM) Value/Share (M$) Sum of Parts Construction (includes MRT PDP fees NPV at WACC of 9%) 5,118.2 2.48 Property 4,829.6 2.34 Litrak 1,012.3 0.49 Malaysian toll concessions 908.5 0.44 Indian toll concessions 284.8 0.14 Water concession 1,198.2 0.58 Net cash/(debt) (265.8) -0.13 Total SoTP 13,085.6 6.34 Source: J.P. Morgan estimates FD SoTP/share (M$) 5.94 Dec13 SoTP/share (M$) 6.00 EPS: J.P. Morgan vs consensus J. P. Morgan Consensus At our M$6.00 PT, Gamuda will be trading on CY14E P/E of 15.2x, below its historical average P/E of 18x. Going forward, we believe the key driver is domestic-led infrastructure spending. Downside risks to our PT emanate from project execution, delays in project awards, sharp spikes in building material costs that affect margins, and lower than expected property sales. FY13E 0.23 0.28 FY14E 0.35 0.32 FY15E 0.54 0.37 Source: Bloomberg, J.P. Morgan estimates 31% Construction Property Concessions Table 1: Construction sector peer comparison As at: 27 Jun-13 Ticker Mkt cap Price Rating Target P/E 2yr EPS CAGR ROE Div Yld Net gearing (US$mn) (LC) (LC) CY13E CY14E 2012-2014 FY13E FY14E FY13E FY13E FY13E Gamuda GAM MK 3,226 4.56 OW 6.00 16.8 11.2 28.0% 11.3 15.8 2.0% 2.2-26.7% Hock Seng Lee HSL MK 346 1.98 NC - 11.4 9.8 11.1% 18.0 18.5 1.8% 2.0-53.3% IJM Corp IJM MK 2,443 5.56 OW 6.80 15.3 12.0 25.9% 7.8 9.9 2.3% 1.4 54.5% WCT WCT MK 857 2.49 OW 2.75 13.1 12.0 9.6% 9.9 9.9 3.0% 1.1 8.5% Weighted average 6,871 15.6 11.5 24.1% 10.2 13.1 2.2% 1.7 5.2% Source: Bloomberg, J.P. Morgan estimates. Bloomberg consensus for Hock Seng Lee. 2
Table 2: Gamuda 3Q13 results summary M$MM 3Q13 3Q12 %Y/Y 2Q13 % Q/Q 9M13 9M12 %Y/Y Revenue 906 706 28% 875 3% 2,552 2,117 21% Pretax 107 196-45.4% 202 9% 492 551-10.8% Pretax margin (%) 11.8% 28% 23% 24% 26% Core net profit 184 123 50% 157 18% 487 357 36% Net profit margin (%) 20% 17% 18% 19% 17% Core EPS (M$ sen) 8.8 6.7 32% 7.5 17% 23.3 19.7 19% Source: Company. Figure 1: Gamuda quarterly revenue and net profit 250 225 200 175 150 125 100 75 50 25 0 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 Source: Company. Figure 2: Gamuda construction margin 16% 14% 12% 10% 8% 6% 4% 2% 2.5% 0% 4Q07 9.0% 1Q08 Source: Company. 10.9% 2Q08 7.8% 3Q08 Revenue 3.7% 4.2% 1.9% 1.3% 2.7% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 5.9% 4Q10 Net profit 5.5% 1Q11 6.8% 2Q11 11.4% 3Q11 7.4% 4Q11 11.2% 1Q12 13.4% 14.8% 2Q12 3Q12 9.1% 4Q12 1000 750 500 250 0 13.5% 11.5% 11.2% 1Q13 2Q13 3Q13 Other key points during analysts briefing *Recently purchased two plots of landbank totaling 813 acres at Rawang. M$19.65 p.s.f. for a 724-acre land (M$620MM cost) and M$12 p.s.f.(<$47mm cost) for an 89-acre piece of land. Combined GDV of M$5B. Confident of sales given accessibility to highway, commuter and upcoming MRT line in Sg. Buloh. Maiden contribution likely in FY16. *Very strong property sales at Horizon Hills, contribution 60-65% of new property sales of M$1B in 9MFY13. Revising property sales projection for FY13 15% higher to M$1.6B. Unbilled property sales stands at M$1.2B. 3
Table 3: SoTP Valuation Valuation Methodology Value (M$ MM) Value/share (M$) Construction (includes MRT PDP fees NPV at WACC of 9%) P/E of 18x 5,684.9 2.75 Property P/E of 18x 4,699.0 2.28 Litrak M$4.40 market price 1,012.3 0.49 Malaysian toll concessions DCF @ WACC of 9% 908.5 0.44 Indian toll concessions DCF @ WACC of 15.4% 284.8 0.14 Water concession DCF @ 9% WACC 1,198.2 0.58 Net cash/(debt) (565.8) -0.27 Total SoTP 13,221.8 6.40 FD SoTP/share (M$) 6.00 CY13 PT (M$) 6.00 Source: J.P. Morgan estimates Figure 3: Gamuda share price to SOTP M$6.0 M$5.0 M$4.0 M$3.0 M$2.0 M$1.0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Bloomberg, J.P. Morgan estimates. Figure 4: Gamuda PE band Source: Bloomberg, J.P. Morgan estimates. GAM share price SoTP based PT 60 55 50 45 40 +2SD = 37.3x 35 30 +1SD = 27.7x 25 20 15 10 Mean = 18.1x -1SD = 8.6x 5 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 4
Figure 5: Gamuda PB band 4 3.5 3 2.5 2 1.5 1 +2SD = 2.8x +1SD = 2.3x Mean = 1.8x -1SD = 1.3x -2SD = 0.8x 0.5 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Source: Bloomberg, J.P. Morgan estimates. 5
JPM Q-Profile Gamuda Bhd (MALAYSIA / Industrials) As Of: 21-Jun-2013 Quant_Strategy@jpmorgan.com Local Share Price Current: 4.75 12 Mth Forward EPS Current: 0.32 6.00 0.40 5.00 4.00 3.00 0.35 0.30 0.25 0.20 2.00 0.15 1.00 0.00 0.10 0.05 0.00 Earnings Yield (& local bond Yield) Current: 7% Implied Value Of Growth* Current: 22.90% 25% 12Mth fwd EY Malaysia BY Proxy 20% 15% 10% 5% 0% 0.80 0.60 0.40 0.20 0.00-0.20-0.40-0.60-0.80-1.00 PE (1Yr Forward) Current: 14.9x Price/Book Value Current: 2.3x 30.0x 7.0x PBV hist PBV Forward 25.0x 6.0x 20.0x 15.0x 10.0x 5.0x 4.0x 3.0x 2.0x 5.0x 1.0x 0.0x 0.0x ROE (Trailing) Current: 14.39 Dividend Yield (Trailing) Current: 3.73 25.00 16.0 20.00 14.0 12.0 15.00 10.0 8.0 10.00 6.0 5.00 4.0 2.0 0.00 0.0 Summary Gamuda Bhd 3329.65 As Of: 21-Jun-13 MALAYSIA 12.184528 SEDOL 6359881 Local Price: 4.75 Industrials Construction & Engineering EPS: 0.32 Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg 12mth Forward PE 14.95x 4.51 24.40 13.61 14.51 21.54 7.48-70% 63% -9% -3% P/BV (Trailing) 2.34x 0.97 6.15 2.14 2.27 3.86 0.68-58% 163% -9% -3% Dividend Yield (Trailing) 3.73 0.58 14.43 2.82 3.10 7.53-1.33-84% 287% -24% -17% ROE (Trailing) 14.39 6.24 20.51 13.38 12.76 20.23 5.29-57% 43% -7% -11% Implied Value of Growth 22.9% -0.87 0.56 0.27 0.24 0.66-0.17-480% 144% 20% 6% Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP) 6
Gamuda: Summary of Financials Income Statement Cash flow statement M$ in millions, year end Jul FY11 FY12 FY13E FY14E FY15E M$ in millions, year end Jul FY11 FY12 FY13E FY14E FY15E Revenues 2,673 3,087 2,949 4,194 6,468 Earnings before tax 545 728 557 874 1,384 % change Y/Y 8.9% 15.5% (4.5%) 42.2% 54.2% Depr. & amortization 21 22 24 26 29 EBITDA 398 561 313 552 992 Change in working capital -1,051-103 534 829 1,117 % change Y/Y 42.8% 40.9% -44.2% 76.4% 79.7% Taxes -81-112 -162-74 -141 EBIT 378 539 289 526 963 Others 39 12 45-639 -783 % change Y/Y 45.3% 42.7% NM 82.1% 83.3% Cash flow from operations -528 548 998 1,016 1,606 EBIT Margin 14.1% 17.5% 9.8% 12.5% 14.9% Net Interest -16-17 9 37 78 Capex -500-300 -300-300 -300 Earnings before tax 545 728 557 874 1,384 Disposal/(purchase) - - - - - % change Y/Y 32.1% 33.7% -23.5% 56.9% 58.4% Net Interest -16-17 9 37 78 Tax -112-162 -74-141 -261 Other - - - - - as % of EBT 20.5% 22.3% 13.4% 16.1% 18.8% Free cash flow -1,043 232 707 753 1,384 Core net profit 425 547 592 724 1,116 % change Y/Y 31.7% 28.7% 8.1% 22.4% 54.2% Equity raised/(repaid) 39 15 0 0 0 Shares outstanding 2,065 2,065 2,065 2,065 2,065 Debt raised/(repaid) 0 0 0 0 0 Core EPS 0.21 0.27 0.29 0.35 0.54 Other 637 150 220 300 371 % change Y/Y 29.3% 28.7% 8.1% 22.4% 54.2% Dividends paid -197-165 -176-206 -258 Fully diluted EPS 0.21 0.27 0.22 0.34 0.51 Beginning cash 1,950 1,386 1,616 2,368 3,214 % change Y/Y 29.3% 28.7% -15.2% 49.1% 51.4% Ending cash 1,386 1,616 2,368 3,214 4,712 DPS 0.08 0.08 0.09 0.11 0.14 Balance sheet Ratio Analysis M$ in millions, year end Jul FY11 FY12 FY13E FY14E FY15E M$ in millions, year end Jul FY11 FY12 FY13E FY14E FY15E Cash and cash equivalents 1,386 1,616 2,368 3,214 4,712 EBITDA margin 14.9% 18.2% 10.6% 13.2% 15.3% Accounts receivable 1,951 1,729 1,202 909 602 Operating margin 14.1% 17.5% 9.8% 12.5% 14.9% Inventories 1,351 1,878 1,794 1,951 2,409 Net margin 15.9% 17.7% 16.0% 17.3% 17.3% Others 0 0 59 0 0 Current assets 4,688 5,223 5,363 6,074 7,722 Sales per share growth 6.8% 15.5% (4.5%) 42.2% 54.2% LT investments 513 480 480 480 479 Sales growth 8.9% 15.5% (4.5%) 42.2% 54.2% Other long term assets 1,740 1,783 1,991 2,260 2,552 Net profit growth 31.7% 28.7% -13.7% 53.3% 54.2% Net fixed assets 610 1,009 1,287 1,564 1,839 EPS growth 29.3% 28.7% (13.7%) 53.3% 54.2% Total Assets 7,551 8,494 9,121 10,379 12,592 Interest coverage (x) 25.38 33.56 - - - Liabilities Short-term loans 626 1,327 511 511 511 Net debt to equity -17.2% 14.0% -26.7% -41.5% -61.9% Payables 1,535 1,721 1,644 2,338 3,606 Sales/assets 0.37 0.38 0.33 0.43 0.56 Others 24 53 0 7 127 Assets/equity 2.12 2.10 2.10 2.15 2.23 Total current liabilities 2,170 3,100 2,096 2,857 4,244 ROE 11.9% 14.2% 11.3% 15.8% 21.3% Long-term debt 123 855 700 700 700 ROCE 8.9% 10.1% 4.9% 9.1% 14.9% Other liabilities 171 270 270 270 270 Bonds 1,200-1,500 1,500 1,499 Total Liabilities 3,664 4,225 4,566 5,326 6,713 Minorities 200 221 221 221 221 Shareholders' equity 3,687 4,048 4,335 4,831 5,659 BVPS 1.79 1.96 2.10 2.34 2.74 Source: Company reports and J.P. Morgan estimates. 7
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Gamuda. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com. Gamuda (GAMU.KL, GAM MK) Price Chart Price(M$) 10 9 8 7 6 5 4 3 2 1 0 Oct 06 OW M$4.75 N M$2.6 OW M$2.3 N M$3.7 OW M$3.9 UW M$4.4 N M$3.3 N M$1.8 UW M$3 N M$3.2 M$2.65 UW M$4.75 UW M$3.3N M$2.2 N M$2.6 UW M$2.7 N M$3.8 N M$3.1 OW M$4.3OW M$ Jul 07 Apr 08 Jan 09 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Nov 12, 2006. Oct 09 Jul 10 Apr 11 Jan 12 Oct 12 Jul 13 Date Rating Share Price (M$) 12-Nov-06 OW 2.30 2.65 30-Jan-07 OW 3.45 3.90 28-Mar-07 OW 4.12 4.75 18-Oct-07 UW 4.70 4.75 11-Nov-07 UW 4.44 4.40 21-Feb-08 UW 4.20 3.30 02-May-08 N 3.12 3.30 26-Jun-08 N 2.33 2.60 24-Sep-08 N 2.31 2.20 17-Dec-08 N 1.82 1.80 03-Mar-09 OW 1.95 2.30 16-Jun-09 N 2.68 2.60 15-Sep-09 UW 3.25 3.00 10-Mar-10 UW 2.79 2.70 24-Nov-10 N 3.63 3.80 29-Sep-11 N 2.87 3.10 15-Dec-11 N 3.09 3.20 20-Mar-12 N 3.62 3.70 09-Nov-12 OW 3.66 4.30 12-Jun-13 OW 4.72 6.00 Price Target (M$) The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, www.jpmorganmarkets.com. Coverage Universe: Mak, Hoy Kit: Berjaya Sports Toto (BSTB.KL), British American Tobacco (M) Bhd (BATO.KL), Gamuda (GAMU.KL), Genting Berhad (GENT.KL), Genting Malaysia (GENM.KL), IJM Corporation (IJMS.KL), KNM Group Bhd 8
(KNMP.KL), KPJ Healthcare Berhad (KPJH.KL), MMC Corporation Berhad (MMCB.KL), Malaysia Airports Holdings Berhad (MAHB.KL), Parkson Holdings Bhd (PRKN.KL), Tenaga (TENA.KL), Top Glove Corporation (TPGC.KL), WCT Berhad (WCTE.KL), YTL Power (YTLP.KL) J.P. Morgan Equity Research Ratings Distribution, as of March 30, 2013 Overweight (buy) Neutral (hold) Underweight (sell) J.P. Morgan Global Equity Research Coverage 43% 44% 13% IB clients* 54% 47% 38% JPMS Equity Research Coverage 42% 50% 9% IB clients* 74% 64% 57% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above. 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Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. "Other Disclosures" last revised May 4, 2013. Copyright 2013 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P 10
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