Analysts positive on Gamuda’s takeover offer

KUCHING: Analysts are positive on Gamuda Bhd’s (Gamuda) 40 per cent owned associate Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) receiving a take-over offer at RM2.55 billion from Air Selangor and analysts are positive on the development.

While the offer price of RM2.55 billion represents a 26 per cent discount to Splash’s net book value of RM3.5 billion as of December 2017, analysts are still positive on the offer and believe Gamuda will likely accept it as it still higher than the net offer back in 2014 of RM250.6 million and that the water production concession held by Splash is no longer sustainable.

“This is because water distributor Syabas, the sole offtaker for the treated water it produces, has not been able to settle the amounts billed by Splash due to its inability to raise tariffs despite rising costs and bulk water supply rates.

“And Syabas has also not been able to embark on initiatives to reduce non-revenue water due to lack of funding,” explained AmInvestment Bank Bhd (AmInvestment Bank) in a recent company update.

Analyst Kenanga Investment Bank Bhd (Kenanga Research) also advocated that Gamuda should take up the offer from Air Selangor.

Should the deal go through, analyst Kenanga Investment Bank Bhd (Kenanga Research) expected Gamuda’s net gearing of 0.55-fold as of the third quarter of 2018 (3Q18) to come off to 0.42-fold.

“However, we believe that the possibility for a special dividend is slim as management might conserve cash for future projects like the Penang Transport Master Plan, and MRT3,” added the research arm.

The proposed acquisition of Splash by Air Selangor includes 100 per cent of the associate’s ordinary shares and its redeemable unsecure loan stocks of which RM1.9 billion will be paid upfront while the remaining RM650.0 million will be settled via a 9-year installment plan.

While both analysts are of the opinion that the development is positive to Gamuda, Kenanga Research adds on that the acceptance of the offer will have a negative impact to their FY19 estimated earnings as it would incur losses of RM300 million from the disposal of Splash coupled with circa RM100.0 million of core earnings contribution from Splash.

Nevertheless, Kenanga Research makes no changes to their FY19-19 estimated earnings for now, pending the decision from Gamuda and maintain their ‘Outperform’ call on the construction player based on an unchanged sum-of-parts (SoP) driven target price (TP) of RM4.35 for now.

Meanwhile, AmInvestment Bank believed that the positivity of the takeover offer has already been fully priced in by the market. It cut its FY18 forecasted earnings by 11 per cent and trim its fair value by 3 per cent to RM3.36, maintaining its ‘hold’ call on the stock.