(July 8): Gamuda’s substantial shareholders — those that own more than 5% of the issued shares of the construction and property development company — are concerned about the takeover offer from the Minister of Finance Inc (MOF Inc) for the four highway concessionaires that the company has stakes in.
This is because the water and expressway concessions business accounts for about a third of Gamuda’s profit before tax (PBT). Without it, the company’s earnings would become cyclical and lumpy as it would be left with the engineering and construction and property development businesses.
“If you look at Gamuda’s balance sheet, the net book value of its expressway assets is about RM1 billion ($327.6 million) and the business contributes about RM200 million to earnings every year. That is a return of about 20%, which is a very good return,” says an analyst.
“Some of the major shareholders are wondering what kind of business Gamuda would be able to quickly invest in and build up to supplement its earnings and provide it with middle to high-teen returns annually.”
The analyst adds that the major shareholders are aware of the risk of not taking up MOF Inc’s offer. They think that if the offer is rejected, there may be persistent regulatory pressure in the future — for example, the government might not allow the concessionaires to raise toll rates.
The Pakatan Harapan government is committed to fulfilling its election manifesto, one of which is the abolition of tolls. However, since taking over the government in May last year, the coalition has had a difficult time fulfilling many of its promises owing to the financial and economic conditions in the country.
On June 21, Gamuda and its public listed associate Lingkaran Trans Kota Holdings (Litrak Holdings) announced to Bursa Malaysia that they had received letters of offer from MoF Inc to acquire their respective stakes in four highway concession companies.
MoF Inc is offering RM1.377 billion cash less any outstanding indebtedness for all the securities in Kesas; RM1.984 billion for Sistem Penyuraian Trafik KL Barat (SPRINT); RM2.47 billion for Lingkaran Trans Kota (Litrak); and RM369 million for Syarikat Mengurus Air Banjir dan Terowong (SMART).
Gamuda has a stake of 70% in Kesas Holdings, the holding company of Kesas; 52% in Sistem Penyuraian Trafik KL Barat Holdings, the holding company of SPRINT; 44% in Litrak Holdings, the holding company of Litrak; and 50% in Projek SMART Holdings, the holding company of SMART.
Based on its effective interest in these toll highways, Gamuda expects its share of anticipated equity value of the concession holders to be RM2.36 billion. On June 27, the company announced that its board of directors had resolved to accept the offers.
Gamuda will need to present the deal to its shareholders to approve the acquisition. An extraordinary general meeting is expected to be called before November. Meanwhile, MOF Inc will need to conduct due diligence and present the deal to the Cabinet for its approval.
“The shareholders’ concern is valid as Gamuda had already sold its water concessions to the Selangor state government. If the highway concessions are sold as well, the company would lose all the assets that have been providing it with stable, recurring income all these years.
“There are not many businesses in Malaysia that can provide the kind of stable, high returns of the water and highway concessions. Gamuda might have to look outside of the country to find such investments,” says another analyst who spoke to The Edge Malaysia.
Analysts covering the counter have reduced their projection of the company’s earnings for the financial year ending July 31, 2020 (FY2020) and FY2021, reflecting the loss in toll highway earnings contribution post-disposal.
Loong Chee Wei, an analyst at -Affin Hwang Capital, has cut his projected core earnings per share (EPS) for Gamuda by between 16% and 28% to 21 sen for FY2020 and FY2021.
Public Investment Bank analyst Nurzulaikha Azali has projected that Gamuda’s FY2020 and FY2021 earnings could be lower by an average of 30.1% upon the completion of the disposal.
