GAMUDA - Start of rising earnings trend

Start of rising earnings trend; new warrants to “reward” shareholders Earnings improved, warrants enticing. Gamuda’s 1QFY10 net profit was within our expectation as property sales and construction margins improved. A surprise 6sen interim DPS (+50% YoY) was declared, leading us to raise full-year DPS forecast to 12sen from 8sen. A new 1-for-8 5-year warrants to raise RM742m (maximum) is offered at just 10sen each (exercise price not fixed yet), which will provide longer term funding, particularly for its Vietnam property ventures. Buy.

1QFY10 results in line. 1Q’s healthy RM63m net profit (+14.5% YoY, +45.6% QoQ) was within our expectation (22% of our FY10 forecast), but appeared to be below the market’s, at 19% of full-year consensus earnings. Improved property sales of RM250m in 1Q10 (+210% YoY) and better construction margins aided YoY pretax profit growth, aside from continued sturdy contribution from its water concessions (see segmental breakdown for details). Net gearing improved significantly to just 0.09x (Jul 09: 0.12x), with net debt narrowing to RM278m (Jul 09: RM385m). Interim DPS of 6sen was higher than our 4sen projection.

Proposes 1-for-8 renounceable warrants. This involves a maximum 267.7m warrants which will be issued at 10sen each. The issuance will raise RM26.8m gross proceeds initially and up to RM714.8m over a 5-year period to fund Gamuda’s long-term plans, particularly its Vietnam property development projects. The warrants’ exercise price has yet to be determined, but an indicative is RM2.67 based on Gamuda’s last 5-day weighted average share price. We estimate a net 4% EPS dilution. At an issue price of just 10sen, the proposed warrants serve to entice shareholders to ride on the long-term upside potential of Gamuda.

Maintain Buy. We expect a more active rollout of major government infrastructure jobs in 2010. Prospects for Gamuda are improving on more manageable building material costs and a healthier property demand outlook. The group continues to vie for Middle East projects in Qatar, Bahrain and Oman worth a total RM4b. We retain our forecasts, expecting an improving QoQ earnings trend. Our forecasts imply a strong 45% rebound in FY10 profits. Our RNAV-based TP is RM3.80.