Priced To Perfection

Trying to find a SELL report on Gamuda is near impossible. Going ex-today for its 1-for-1 bonus. RM4.60-4.70 now, seems to me too many positives have been priced in. When all the positives have been priced in, everything needs to go right. When everyone is a buyer, all the longs can only sell in the future.

The Positives:

a) Gamuda has supposedly received an offer from Kump Darul Ehsan to buy out its 40% stake in Splash water concession. KDE currently holds a 30% stake in Splash. Splash is the largest water producer in Selangor (supplying 43% of the state's needs). Concession ends in 2030. Gamuda may get RM700m-RM1bn. If the deal goes ahead, there could be a special dividend in the works of about 40 sen per share.

b) The high scale Vietnam project. Its an excellent exposure for the company and foreign institutional investors see Gamuda as a good proxy play into Vietnam. The project is expected to make up more than 30% of Gamuda's earnings in 3 years time. The Yen So Park is expected to have GDV of RM8bn and will feature grade A office towers, high class hotels and entertainment centres. The linked RM1.5bn sewerage project has already started.

c) Losing Splash potentially but has made headways in bidding for the RM5bn tunnelling portion for the Pahang-Selangor intertstae water transfer tunnel. Gamuda is also the frontrunner for the RM11bn Klang Valley LRT upgrade.

d) Other secured big projects keeping Gamuda busy include the RM6bn northern railway tracking project and the RM2bn 32-year Nam Theun hydroelectric project.

e) Dividend yield more above 4%.

To me, it is certainly better in terms of regional exposure. Even though its property projects in Malaysia are decent, at least they are not dependent on that division ( yes, I am already bearish on mid-high end Malaysian property). Their biggest is Horizon Hills with a GDV of RM2.5bn. Next will be the Bandar Botanic with a GDV of RM1.6bn and Jade Hills with a GDV of RM1.5bn.

Its 2008 revenue is expected to jump some 40% to RM2.1bn. Many houses expect Gamuda to make a net profit of at least RM350m (RM185m in 2007) in 2008. That's an EPS of 21 sen. At RM4.60, we are looking at 22x 2008 earnings ... are we in Shanghai Exchange? That's not the frothy part ...yet. Gamuda has been going on numerous roadshows, putting itself as a Vietnam play. Gamuda's 2009 revenue is slated to reach RM4.3bn in most analysts' projections. Net profit is expected to jump to RM650m in 2009 or an EPS of 39 sen (a PER of 11.8x on today's share price). Decent enough .. but wait.

Its all hunky-dory because Gamuda feels it will be able to extract much higher margins from the huge Yen So project in Vietnam. Here comes the danger: for 2007, their EBITDA margins came in at a believable 7.7%; that is supposed to rise to 12% in 2008; and the margins is supposed to reach 14% in 2009. While the company can justify those projections based on current sentiment in Vietnam and Asian property markets in general, this also brings about a lot of execution risks and exposure risks, after all we are talking about Vietnam and not Singapore. Plus we are talking of 2-4 years out in the future in a newly emerging economy. Hence the substantial jumps in margins may be asking for a lot of optimism on just one big project.

Hence for all the positives, Gamuda is priced for Perfection, and priced to Perfection. Upside very limited, may have more downside instead.