Value in Gamuda shares

  • Business
  • Wednesday, 27 Feb 2019

KWAP and its fund manager had acquired 3.217 million Gamuda shares on Monday.

PETALING JAYA: Market reaction towards news that the government has initiated talks with GAMUDA BHD on highway acquisitions has been overly pessimistic, says Credit Suisse Equity Research.

The resulting share price weakness, the research house said, has created an opportunity to accumulate Gamuda shares.

“In our view, the sharp price decline suggests that the market might be overly pessimistic on the risk that Gamuda might be forced to sell its tollway concessions at an unfavourable price,” it said, reiterating its “outperform” stance on the counter.

On Saturday, the government announced that it had commenced talks with Gamuda to negotiate the acquisition of concessions for four highways in which the group owns majority stakes.

The highways are the Shah Alam Expressway (Kesas) and the SMART Tunnel, in which it owns 50% and 70% direct stakes, respectively; the Lebuhraya Damansara Puchong (LDP) in which it has a 43.6% stake via its 43.6% stake in Lingkaran Trans Kota Holdings Bhd (Litrak); and the Western KL Traffic Dispersal Scheme (Sprint), in which it has an effective stake of 51.8%.

On Monday, Gamuda saw its share price taking a hit, falling 18 sen or 5.92% in a knee-jerk reaction, closing at RM2.86.

Credit Suisse, in its report, said it did not see material risk of Gamuda being forced to sell its tollway concessions at an unfavourable price.

It noted three points that it believed would soothe investors’ concerns.

First, it said, the negotiations are on a “willing buyer and seller” basis, which means that there is no regulatory pressure on Gamuda to divest, unless the price is favourable.

“In order to look after the best interests of minority shareholders at Gamuda and Litrak, management will also need to ensure that the toll road concessions are sold at a fair price,” it said, comparing it to negotiations on the sale of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd, whereby the management was not pressured into accepting the initial offer.

The second point, it said, was based on the fact that transaction prices for past deals had been mostly based on discounted cashflow (DCF) valuations and would likely be used as a benchmark for negotiations.

All transactions have so far been priced at over three times price-to-book value (P/BV), with the exception of the Eastern Dispersal Link which was priced at 1.1 times P/BV due to cashflow constraints.

Thirdly, it believes the highways could be a worthy investment for the government, and be able to generate reasonable returns.

“As such, we think the government can afford to offer a fair price to Gamuda for the four toll roads,” it said.

It added that by taking over the highways, the government is estimated to be able to save some RM260mil each year in compensation payments.

On valuations, Credit Suisse noted that Gamuda intended to value the highways based on existing concession terms, and not based on the proposed tolling arrangements post-acquisition.

It estimated that Gamuda’s stake in the highways is worth over RM3bil, or over RM1.20 per share, and believes that there is a “reasonable chance that it can monetise its tollway assets at a fair price”.

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