Gamuda 2Q earnings may miss consensus

KUALA LUMPUR: GAMUDA BHD []'s second-quarter (2Q) profit is expected to fall short of analysts' forecasts as the builder is not spared from the slow recovery on margin in CONSTRUCTION [] industry.

RHB Research estimated Gamuda's 2Q net profit to come in at between RM65 million and RM75 million, which is higher than RM49.05 million in the previous corresponding period.

The estimated profit will bring the group's net profit to the range between RM128 million and RM133 million, which is 43% of Bloomberg's consensus forecast of an annual profit of RM306.7 million for the financial year ending July 31, 2010.

"Taking the cue from the still sub-par construction margins recorded by peers IJM (Corporation Bhd) and WCT (Bhd) in their just-released October to December 2009 results, we expect Gamuda's 2QFY10 results, due out by the end of the month, to miss expectations," said the research house in a recent note.

The company is scheduled to release its 2QFY10 and 1HFY10 results on Thursday, March 25, which is going to be a prelude to how its full-year result is going to turn out.

RHB said with no signs of improving construction margins, it had downgraded FY10 net profit forecast for Gamuda by 5% to RM277 million, having reduced its blended construction earnings before interest and tax (Ebit) margin from 5% to 4.1%.

Gamuda is trading at a trailing PE of 27 times. Its shares ended eight sen lower at RM2.72 last Friday.

However, OSK Research Sdn Bhd analyst Jeremy Goh is more optimistic on Gamuda's earnings. He said Gamuda would be able to meet consensus in the current fiscal year as he expected better performance in 2HFY10 versus 1HFY10.

He expects Gamuda to post better 2Q10 results compared to that of 1Q10 of RM63.02 million due to improved construction margins, especially from its Ipoh-Padang Besar double-track job. He foresees margin to continue improve quarter-on-quarter.

"When steel prices went crazy in 2008, Gamuda recognised low margins for that project. With the more favourable prices now, margins will start to normalise," said Goh. OSK's estimate for Gamuda's full-year net profit is RM300.3 million.

"Based on its 1Q result, it appears that Gamuda could not hit the consensus target. But the second half of its fiscal year will be better than the first half and this will help Gamuda meet consensus," he noted.

On a calendar year (CY) basis, the two largest construction outfits, IJM and Gamuda, saw smaller operating margins in 2009 compared to 2008. Based on Bloomberg data, IJM saw its operating margins shrunk to 14.8% in 2009 from 18% the year before while Gamuda saw its operating margin halved to 6.4% from 13.2%.

RHB noted that IJM's construction pre-tax margin only recovered marginally from 1.4% to 2.2%, while WCT's group Ebit margin fell from 4.7% to 1.9% over the last three months.

It explained that WCT's construction Ebit margin is not a good benchmark as it is inflated by inter-company dividend payment, as the impact of cost inflation had remained deeply entrenched in the industry.

RHB has also trimmed Gamuda's fair value from RM2.12 to RM2.05 based on 14 times revised CY10 earnings per share of 14.7sen, in line with its one-year forward target price-to-earnings (PE) for the sector of 10 to 14 times.

The house said it is turning a little more upbeat on the sector, prompted largely by investors' improving risk appetite for construction stocks following the massive underperformance of the sector vis-à-vis the market in 4Q09 and 1Q10.

It also believed that there would be better sector news flow and new expectations leading up to the announcement of the 10th Malaysia Plan (10MP) in June 2010.

RHB has also trimmed Gamuda's indicative fair value from RM2.12 to RM2.05 based on 14 times revised calendar year 2010 earnings per share of 14.7sen, in line with its one-year forward target price-to-earnings (PE) for the sector of 10 to 14 times.

Apart from shrinking construction margins, devaluation of the Vietnam dong and its interest in Syarikat Pengeluar Air Sungai Selangor Sdn Bhd, which was caught in a water-restructuring deadlock, have weighed down on the stock.