Kenanga Research maintains "outperform" call on Gamuda amid mega infrastructure project reviews

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KUALA LUMPUR: Kenanga Research is maintaining its “outperform” call on Gamuda Bhd in spite of the negative sentiment in the construction sector and cost reviews of mega infrastructure projects.

The research house on Wednesday said that it was holding to its call as it believed that the negatives have been priced in. 

“All-in, we believe that most of the negative events for Gamuda i.e. MRT2 cost review and potential delay in MRT3 have been priced in. 

“At current level, the stock is trading at FY19E price-to-earnings ratio (PER) of 9.9 times  which is below is 5-year -2 standard deviation (SD) level. 

Hence, we believe that negatives for the stock have been well priced in and it is currently a good opportunity for bottom fishing. We have yet to 
factor in the potential from Penang Transport Master Plan, “ it noted.

The brokerage said it was not making changes to its financial year (FY) 2019-20 earnings estimate for the time being, pending the outcome on MRT2’s cost review. 

The research house said it did not expect Gamuda to win any big jobs in FY19 until the cost review for MRT2 is concluded. However, risks to its call Kenanga said would include unexpected delay of MRT2 project, higher-than-expected input costs, and lower-than-expected property sales. 

Currently, Gamuda is working closely with the government in effort to bring down the cost for MRT2. The review is taking longer than expected and the brokerage said it has no confirmed quantum on how much the project will be scaled down. 

“However, based on our sensitive analysis, an RM8bil reduction in contract size down to RM23bil (from RM31bil originally) will only result in a 4.4% reduction in FY 19E CNP (based on it cost review sensitivity analysis); substantial risk to earnings is when the reduction is more than RM8bil,’’ it noted.