KUCHING: While Gamuda Bhd (Gamuda) is seen as the best proxy to the buoyant construction sector given its dominant role the Klang Valley MRT project, there is now limited upside to its share price, analysts viewed.
RHB Research Sdn Bhd (RHB Research) said there is probably a limited upside to its share price as it has risen 42 per cent since 2013 and it expected earnings to contract by 13 per cent in the financial year 2016 (FY16) on completion of MRT1.
Furthermore, it believed while the market has priced in ‘gains’ from Gamuda’s potential involvement in the RM27 billion Penang Transport Master Plan, it has overlooked the “pains before gains” including the possibility of a cash call.
“We downgrade Gamuda to ‘neutral’ from ‘buy’ given the limited three per cent upside to our target price of RM5.35 (per share).
“Despite a general weak equity market in Malaysia, its share price has still nudged up by three per cent year to date, bringing its gains since 2013 – largely fuelled by the market’s excitement over its involvement in the Klang Valley MRT project – to a whopping 42 per cent,” it explained.
RHB Research sees a declining reward-versus-risk profile for Gamuda over the next 12 months due to many reasons including the consensus’ estimate for its FY16 earnings is behind the curve, having erred on what is termed as “the side of not listening”.
It added, it sees rising risk of Gamuda’s property profits on continued deterioration in the confidence and sentiment of property buyers in general.
Aside from that, RHB Research noted, while the market happily prices in its potential gains from the RM27 billion Penang Transport Master Plan, it may have overlooked the “pains before gains”, including a potential cash call.
The research firm also pointed out possible risk in further delays for the disposal of Gamuda’s 40 per cent stake in Splash, and the possibility of the Government eventually deferring certain public jobs on the back of the continued slump in oil and gas prices.
All in, RHB Research said, “We maintain our sum of parts-based target price at RM5.35 per share. We value Gamuda’s construction business at 18-folds one-year forward earnings, which is at a premium to our one-year forward target price earnings for the construction sector of 10 to 16-folds to reflect the group’s large market capitalisation and high share liquidity.
“Based on our forecasts and its current share price, Gamuda’s price earnings could rise to 20-folds in FY16 forecast from 17-folds in FY15 forecast on the back of a 13 per cent contraction in earnings in FY16 forecast.
“We believe such rich potential valuations as a result of poor earnings growth prospects over the next 12 months, could cap its share price performance.”