Stock Focus Gamuda’s potential loss of RM920m in water asset divestment affects sentiment

by **Cals** Fri 28 Mar 2014, 19:14

Stock Focus Gamuda’s potential loss of RM920m in water asset divestment affects sentiment

Business & Markets 2014

Written by Jeffrey Tan of theedgemalaysia.com

Friday, 28 March 2014 15:37

KUALA LUMPUR (Mar 28): Gamuda Bhd will incur divestment losses of RM920 million if the Federal Government invokes Section 114 of the Water Services Industry Act 2006 (WASIA) to take over Selangor’s water assets and operations.

This was stressed by several research houses today, including JF Apex Securities.

At 3.16pm, Gamuda slipped 3 sen or 0.65 per cent sen RM4.61 after falling to a low of RN4.60 in morning trades, although yesterday it reported a stronger performance for the second financial quarter. The stock saw trades of some 1.9 million shares.

JF said it was not ruling out the possibility of the WASIA being invoked as the dispute over the Selangor water asset restructuring exercise intensified.

WASIA allows for a compulsory takeover of the water assets in the state by the government in the name of national interest.

JF Apex’s research analyst Soong Wei Siang said: “The risk of the invocation of WASIA and the potential divestment loss of RM920 million could dampen sentiment on the stock.”

“We expect the deadlock and dispute to drag further as the group will contest the decision, if the WASIA is to be invoked.”

Due to the WASIA factor, Soong is maintaining his ‘hold’ call on the stock, with an unchanged ‘limited upside’ target price (TP) of RM4.73.

CIMB Investment Bank Research analyst Sharizan Rosely said in a ‘worst-case’ scenario, Gamuda’s revised net asset value stands at RM5.42 per share.

This is arrived at after factoring in the RM920 million divestment loss and the state’s valuation for Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash).

However, Sharizan said the possibility of a forced takeover scenario seemed ‘far-fetched’.

Despite being clouded by the water assets issue, Gamuda’s construction earnings should accelerate over the next one to two years as the MRT SBK Line crossed critical milestones, opined Sharizan.

“A positive surprise was that the award phase for MRT 2 could start three to six months earlier than the original target of early 2016,” he added.

“The progress of MRT is likely to partially offset the uncertainties of the water takeover outlook.”

For these reasons, Sharizan said CIMB IB is keeping an ‘add’ for the stock, although it has downgraded TP for Gamuda to RM5.21.

“We raise our FY14 to FY16 earnings per share but trim our target price as we update for balance sheet items,” he said.

Similarly, JF Apex’s Soong has also upgraded Gamuda’s FY14 and FY15 net profit by 3.7% to 4.6%, factoring in the faster-than-expected construction progress of MRT into his earnings model.