Mixed calls on Gamuda shares

 

Citigroup is maintaining a 'sell' on the stock, but Hwang DBS is bullish and JPMorgan, meanwhile, is neutral

GAMUDA Bhd, the country's second biggest builder by market value, is getting conflicting vibes from the research community on what investors should do with its shares, as big research firms are giving extremely different advice to their clients.

Valuations on Gamuda are interesting due its sheer size - a construction order book of RM9.5 billion alongside some RM17.9 billion in property of gross development value. Gamuda shares have also outpaced the decline of the benchmark Kuala Lumpur Composite Index (KLCI) by nearly 100 per cent.

Gamuda has tumbled by some 58 per cent so far this year, while the KLCI have slid by as much as 31 per cent.

Although branded a possible takeover target, its shares have taken a beating, as investors remain unsure of the bottom for Gamuda. A slew of issues from trade receivables to a slowdown in the construction sector keeps hammering the stock.

Trade receivables are up by some RM300 million to RM1.32 billion for the quarter ended July 31 2008, from RM1.01 billion in the previous quarter.

Nevertheless, for the 12 months ended July 2008, Gamuda put in a good show, with group net profit climbing to RM325.08 million from RM185.43 million a year ago.

"Gamuda's net profit is 19 per cent above our estimate. The variance came largely from the construction and engineering division where 10 per cent of the double-tracking rail job was recognised as opposed to three per cent in our estimates. No provisions for project delays were seen in the result," wrote Choong Wai Kee of Citigroup.

Citigroup is maintaining a "sell" on the stock on concerns of further earnings risk in its construction business, uncertainty over the sale of its water business and delays in Gamuda's multi-billion ringgit project in Vietnam.

However, Hwang DBS is bullish. This is due to improved operating conditions, a drop in raw material prices, and starting of construction work next month on the Yenso Park's sewerage treatment plant in Vietnam.

"Valuations are undemanding at 12 times 2009 earnings. Buy with target price of RM3, pegged to 15 times 2009 earnings per share. This represents 30 per cent discount from its five year forward PE average," wrote Wong Ming Tek, an analyst at Hwang DBS.

JPMorgan, meanwhile, is neutral, but that hasn't stopped it from trimming Gamuda's earnings for the next two financial years by nine per cent and 20 per cent.

"We estimate Gamuda's net gearing will rise to 52 per cent from its current level of 32 per cent, as it taps the credit line for the Yenso project," Jon Oh wrote in a report on Gamuda.