Saturday, January 06, 2007

Looking Back: Gamuda

I was looking back at some of my old stuff on Gamuda and I realise that this stock is rather interesting and that one could certainly benefit by looking back at what at happened since 2004. Ah yes, this is what we would call as looking at the rear view mirror and it's always much easier to be an expert now based on hindsight but for all its worth, i still reckon it's interesting.

First of all, Gamuda highest ever traded price was about 8.05 and if not mistaken, this was recorded back in 2003. Now in 2004, the slowdown in the construction sector was noticeable and one of the first few construction stocks to be hit was Roadbuilder which fell from the high 3.90s and if not mistaken, it sank to as low as 2.30 or 2.40 back in 2004.

So the constructions were hit and it was not surprising that Gamuda too was hit. Oh, yeah less we forget the debacle in its (Gamuda) foray into the battery business back then.

What was interesting was back in Sept 2004. Gamuda was expected to released its quarterly Q4 earnings that month. Gamuda last traded on the 22nd Sept, it was closed the trading unchanged at 5.35. The next day it dropped 10 sen. Not a worry. However, the next day it dropped 15 sen to close at 5.10. Edgy? However, on the following Monday morning 27th Sept 2004, hell kinda broke loose. Trading was very heavy. And the stock was sold down and ended the day at 4.86, down 24 sen or 4.7%. What's happening? For being considered blue chip quality, the sell down understandably, drew interest from investors. A so-called blue chip investment stock was falling from grace. Was there opportunity to bargain hunt (or as they say use a value investing approach) back then?

And what makes it more interesting is that while some insiders were disposing some shares BUT GSIC (Gov Spore Investment Committee) was actively buying into Gamuda during this period of time.

And on the 27th Sept, Gamuda announced its 2004 Q4 earnings. Gamuda announced a net quarterly earnings of 67.825 million, giving it a tidy net profit of 283 million (this co-incidentally was it's highest ever earnings ever recorded) which was about 17.4% more than it earned the previous fiscal year. So what's happening? The company's earnings was good and decent as ever but the share price highlighted something rather interesting. It was being sold down on the day it released its earnings.

And back then it had 736.788 million shares (note, i am discounting all the possible dilution effects caused by conversion of warrants), it's eps back then was 38.5 sen and using say the price of 4.86, it was trading at a price earnings multiple of just 12.6x. Which looked awfully cheap considering that Gamuda was STILL showing a very impressive earnings growth and compared to its historical price earnings multiple, perhaps there was an investment justification.

A bargain opportunity or a value trap?

Now from the pessimistic point of view or rather some of the concerns with Gamuda. Despite its impressive earnings growth, from its Sept quarterly earnings report, there was concerns with its account receivables, which shot up to 647 million. This was a worry considering that its previous year total was just 506 million, which indicated the difficulties of the water infrastructure companies collecting their debts back then. And not helping at all, despite its strong earnings, it recorded a negative cash flow of some 62 million. And one was probably aware that Litrak was not doing too well with SPRINT recording some losses. And then the slowdown in the construction sector gave it a cloudy outlook. And last but not least the market expectancy issue was rather high. The market was expecting an earnings of around 330 million and Gamuda only delivered some 283 million.

And even those who wanted to look for a trading opportunity was rather edgy on the 27th itself. There wasn't much point in second guessing what was causing the sell down and most of the time stocks come crashing down on high volume means someone out there was rather extremely determined to get rid of their position in the stock. And needless to day, it matters who was doing the selling and commonsense would suggest that it's much better for one to see if the selldown stabilises before determining an entry into the stock (not sure if my comments are correct here) and more so, there wasn't much point in trying to be a hero.

But still, it was a decent set of earnings. And the some of research houses remained firmly bullish on its outlook. Mayban Research wrote the following commentary the following day.

  • Outlook: Despite the weak sentiment on the construction sector, Gamuda’s prospect remains sound mainly due to its diversified exposure and strong track record to win overseas mandates. Its medium-term outlook is underpinned by:
    • Outstanding construction order book of approximately RM2.0b from SSP3 (RM600m), SMART (RM900m) and Overseas (RM500m) to sustain earnings for next 2 years.
    • Unbilled property sales of approximately RM780m from its flagship projects namely Bandar Botanic, Kota Kemuning and Valencia.
    • Improved traffic growth at its associates’ toll concessions SPRINT, KESAS and LDP, which consistently registered 10-15% growth since early-CY04.

    Prospect to grow order book appears good as Gamuda is close to clinch several major awards:

    • Laos hydropower (RM1.5b) – pending feasibility studies.
    • New NKVE expressways (estimated at RM700m) – prospective privatization project.
    • Invited to participate in Phase 2 of Taiwan’s MRT project – following completion of Phase 1 expected by end-05.

    Based on our EPS05 forecast of 42.7 sen, Gamuda is trading at undemanding PER05 of 11.4x, below its historical average trading band of between 12x-16x. The sharp selldown on Gamuda yesterday (-24 sen) is an over reaction as there were no significant surprises in its 4Q04 results. Similarly, we believe that the downside for Gamuda is limited as the stock had shed -10% in the last 5 market days against the KL Construction Index’s -4.7% and the KLCI’s -2.0% decline. Gamuda’s generous dividend FY04 dividend of 21 sen per share (4.3% yield) provides another compelling reason for investors to favour Gamuda. We reiterate BUY on Gamuda as its cheap valuations provide a window of opportunity for re-entry into Malaysia’s blue chip infrastructure specialist. (52w Hi-Low: RM8.05-RM4.72, TP: RM6.40)

A target price of rm6.40? Rather optimistic was my first reaction but some were even more optimistic. RHB wrote the following outlook and recommendation in its notes on 28th Sept.

  • Outlook and Recommendation

    Government development expenditure in 2005 is projected to fall by 9%, following a 21% decline in 2004. In absolute terms, the development expenditure for 2005 is projected at RM28.3bn based on the newly announced national budget, compared with an estimated RM31.1bn for 2004 and RM39.4bn for 2003. This is not surprising given that the Government has over spent in the past years.

    The lower development expenditure in 2005, however, will have less impact on Gamuda given its RM2bn outstanding construction orderbook consisting of SMART, SSP3, Taiwan MRT and road projects in India. Based on Gamuda’s construction "churn rate" of about RM1bn per annum, the outstanding orderbook theoretically could keep it busy for another two years.

    In addition, we understand that Gamuda is fairly close to converting some of its proposals and tenders, both local and overseas, into new orderbook valued at between RM1bn to RM2bn. These include civil works at the 400MW Nam Theun 1 Hydroelectric Power Project in Laos (valued at 60% of the total project cost of between RM1.5bn to RM2bn) and the 23km New North Klang Valley Expressway (NNKVE) that provides an alternative east-west link within the Klang Valley between Petaling Jaya (near Taman Tun Dr Ismail) and Shah Alam (near Bandar Puncak Alam) valued at RM700m.

    Property sales will remain robust due to good locations against a backdrop of favorable macro picture, i.e. rising disposable income, low interest rates and favourable demographics. Underpinning Gamuda’s property profits, are unbilled sales that stand at RM730m currently. Gamuda also hopes to register property sales in excess of RM700m in FY07/05, a repeat of FY07/04 performance. Infrastructure concessions will provide steady but recurring income, with the exception of SPRINT that may continue to be a drag on bottomline if the traffic volume at the Penchala Link fails to improve.

    Indicative fair value of RM7.20 based on 15x FY07/05
    EPS that is in line with our 2005 target market PER. OUTPERFORM rating maintained.

With most being optimistic about Gamuda's outlook (I was told that iCapital was the only negative party and it gave or rather it predicted a support line of rm3.50 for the stock to its subscribers) the stock rallied and by the 4th Oct 2004, the stock recovered most of its losses to close at 5.20 (the stock then drifted lower to 4.90 but managed to close the year at 5.30)

On Dec 21st 2004, it reported its Q1 earnings. Net earnings was 70.020 million. Decent but rather flat and lacklustre. Trailing earnings or net earnings was 286 million, indicating a flat or lacklusture fiscal year earnings.

Despite the flat earnings, which meant that Gamuda earnings was much below the market expectations again, most were still optimistic with the stock. Here was a brief outlook written by Mayban:

  • Outlook: Gamuda’s prospect was recently given a boost when it signed the Laos power venture valued at RM2.09b. While impact on earnings may not be immediate (as construction will only commence in 2006), the agreement reduces concern on Gamuda’s order book replenishment as we expect Gamuda to undertake most of construction works worth approximately RM1.46b. This should keep the company busy until 2008. Elsewhere, Gamuda remains hopeful of seeing the proposed New NKVE project (worth RM700m) take-off in 2005.

Huge project signed. (Ah good point to note from this is the Laos project till today has still yet to contribute to Gamuda's earnings. So signing of a project is just a signing of a project. The execution of the project is rather important issue to consider too)

Anyway, the following day, 22nd Dec, the following news item caught the eye.

  • S’pore GIC reduces stake in Gamuda
    By Jimmy Yeow

    The Government of Singapore Investment Corporation (GIC) has reduced its stake in Gamuda Bhd after disposing of 487,000 shares representing a 0.07% stake in the open market recently.

    Filings with Bursa Malaysia showed that the shares were sold in the open market on Dec 14 and 15.

    Following the disposal, the Singapore GIC, which is wholly owned by the Minister of Finance Inc, Singapore has another 43.63 million or 5.91% direct stake in Gamuda.

    Gamuda closed 15 sen lower at RM5.10 on Dec 14 and 15 sen higher to RM5.25 the next day.

Now during this time, Gamuda's results being flat was rather disappointing due to the high market expectancy of it to deliver but relative to other construction companies, Gamuda was still considered to be performing rather admirably. And this downturn was more or less effected by the government decision to spend less on the construction sector.

But again, most research houses remained firmly optmistic with Gamuda. And not surprisingly, the stock rallied. And by the 14th Jan 2005, the stock hit a high of 5.65 before retracing back to 5.20 on the 15th Feb 2005. And the stock then staged another run hitting 5.65 yet once more on 17th Feb 2005 before closing at 5.45. A potential trading double top of 5.65? (i could be wrong here). Now this top is rather significant as the stock really began its slide.

On the 10th March it ended the day at 5.10. Down 10 sen. This was the start of a long slide and by the 22nd March 2005, the stock closed at a low of 4.62 on the back on some heavy selling the past few trading days. (Here is one issue I always find fascinating. For them so called investment grade stocks, if the stock gets selldown just on the eve of its earnings results, one could probably ass-u-me that something is not right somewhere!)

On the 23rd March, Gamuda announced its Q2 earnings. Again earnings was flat at 69 million. Trailing earnings totalled some 282 million - yet once more indicating a rather flat or sluggish fiscal year earnings. And back then, Gamuda number of shares totalled 749.5 million. Earnings per share based on trailing earnings was some 37.7 sen per share. At 4.62, the stock was trading at an earnings multiple of only 12.3 x.

But yet, the research houses were positive about it. Some were using the Laos project as a key reasoning to buy the stock.

Now I would like to point out the existence of some folks who are pretty much against this project such as shown by this article written and posted on Asia Times Online by Alan Boyd called World Bank's Laos decision damning - for some. The last 4 paragraphs were interesting.

  • The projections assume that Thailand, with a substantial supply surplus, will have an overriding need to import electricity from Laos. Last month, however, Thailand's main planning agency, the National Economic and Social Development Board (NESDB), concluded that the Laotian power was not cost-effective and probably should be canceled.

    Based on current values, the price of Nam Theun 2 power will be 14% higher than the most commercially attractive and fuel-efficient alternative available in Thailand, gas-fired combined-cycle plants. Furthermore, most of the revenues will be deferred, with the result being that the dam will not contribute to more than 5% of Laos' central government income until at least 2020, two-thirds of the way through the concession period.

    In the meantime, 93% of the Nam Theun River's flow will have been diverted into the adjacent Xe Bang Fai River basin for the benefit of Thailand's electrical grid, and nearly 40% of the Nakai Plateau will have vanished beneath a reservoir stretching for 450 square kilometers. Fishing industries will be destroyed as water levels plummet and crop irrigation will become untenable.

    It is difficult to assess the full scope of the economic fallout because no comprehensive environmental impact studies were ever undertaken. However, the bank need only talk to the villagers who were ordered to move when the Nam Theun-Hinboun hydropower project, only 50 kilometers downriver, opened in 1998. Seven years later they are still waiting for the compensation they were promised for the loss of their market gardens and fishing traps.

And despite this and most of despite the falling stock price, some were still optmistic because despite the many negative issues at that time on the construction sector, Gamuda was still managing to hold its own. The growth was missing but earnings was still as solid as ever. And the damage still did not looked as serious. And not forgetting based on the current earnings multiple, at 12.3x, perhaps Gamuda was too cheap to dispose of.

And rallied again the stock did. And by the 28th March, the stock closed at 4.80. But somehow these rallies indicated that the stock could not break out of its downtrend.

I for one believed that it was a rather dangerous assumption to make on a stock just because it appears to be holding on to its own. Yes, it was holding on but perhaps it was due to the contribution from its property and water sector and most of all it was probably due to Gamuda's existing order book, which was still rather impressive. But once these jobs are completed what's next? Based on current valuations, this is a huge risk to carry such stock cos if the govt continues to focus on scaling down its budget deficit, the huge jobs (which is Gamuda's bread and butter) will be but limited.

Ah, the optimistic and the rather pessimistic views in the market.

Anyway, on the 27th June, Gamuda reported its quarterly earnings. Q3 earnings came in at 64.3 million, giving it a trailing earnings of 273 million. The very first indication that Gamuda's earnings would decline. The stock closed the trading day at 4.24. Trailing earnings per share was 36.4 sen, which meant that Gamuda was trading only at an earnings multiple of 11.6x. A value investing to buy now at 4.24?

The earnings momentum was now clearly gone. Target prices were quickly lowered adjusted to the 5.80 region for Gamuda. RHB which was the most optmistic about Gamuda, had a target price of only 5.98 in its research notes published on July 2005.

On 28th Sept, Gamuda announced its Q4 earnings. A very interesting note, the stock broke its current trend of declining before its earnings release. On Sept 6th, it traded as low as 4.18. The stock closed on Sept 28th at 4.50. Something good is to happen? Q4 earnings came in at only 62.3 million, which meant that Gamuda's total fiscal year earnings was only some 265 million. Earnings per share was 35.4 sen.

A good point to note is that there were some positive news about Gamuda which could have been the catalyst of its share price movement. Here is a snippet of one such news.

  • Corporate: Gamuda, WCT back in favour By Siow Chen Ming
    Construction counters are regaining some attention thanks to the positive news flow on the sector recently. Big players such as Gamuda Bhd and WCT Engineering Bhd have managed to bag two huge projects in Qatar this month alone, while on the local front, the government has given the nod for several long-postponed projects such as the Kuala Lumpur-to-Putrajaya toll highway project, which industry observers say may signal an end to the drought in local projects.

Yes, the trend this time has broken. Previously, the stock fell before its earnings and rallied after releasing its quarterly earnings. This time the trend changed. After rallying before its earnings, the stock tumbled after the earnings! And by 8th Nov 2005, Gamuda closed the trading day at 3.58.

A clear value investing trap? The stock that was trading at a supposedly cheap earnings multiple kept on tumbling and tumbling. Did value investing fail here or did was the investor negligent about the risks in the construction sector. The good times or the good cycle in the construction sector was clearly over the day the govt announced that it was cutting back its fiscal spending. The mega projects that Gamuda strives upon was gone. The company had to venture overseas. And that was a difficult hurdle in itself. Laos project was stumbling along. It then ventured into Qatar. A whole new ballgame. A new chapter for Gamuda.

On 20th December 2005, Gamuda announced its 06 Q1 earnings. Earnings was disappointing to say the least. Its earnings was a mere 46.598 million. Trailing earnins is now only 242 million. Which indicates that Gamuda would most likely record a rather disappointing fiscal 2006 earnings. Earnings per share based on its trailing earnings is now 32.4 sen. On 21st December, the stock was punished again. It opened the day at 3.60 and was hammered down, closing the day at 3.28. And again based on current or trailing twelve months earnings, Gamuda did not look expensive, for at 3.28 Gamuda was trading at a pe multiple of 10.1x.

Again, time to ponder once more. Value investing or death trap? Was there a valid reason to invest in Gamuda at this stage? How long would the downtrend in earnings continue?

On the 19th Jan 2006, Gamuda reached an intraday low of 3.04.

Was there a valid investment case for Gamuda?

Yes, valuation at this price does not seem expensive but that's what one had been saying all this while, as far back as in Sept 2004. Valuation based on current earnings has always been cheap during this massive downtrend. And if one buy based just on the earnings as far back as in Sept 2004, would have seen their investment getting whacked the living daylights. Anyway, should one invest now?

On 23rd March 2006, Gamuda Q2 earnings showed more decline. Its quarterly earnings is not only 40.027 million. Its trailing earnings totalled only 213 million, which indicated a serious decline in its earnings momentum. And perhaps due to seriousness in the decline, one should probably be well aware that on an annualised basis of earnings around 40+ million, Gamuda fiscal earnings for 2006 could be as low as in the 160+ million region.

This time around, the stock had rallied instead. Gamuda last traded on the 23rd at 3.78. The next day, after reporting the poor earnings, the stock closed down 10 sen and held on steadily.

And another incredible thing happened. Based on the current prices and current earnings, Gamuda was suddenly trading at a higher earnings multiple of 15.8x and based on an annualised basis, it was trading at an even higher pe multiple of 18x. WOW!

Perhaps it was a good time in January 2006 when Gamuda was trading at 10.1x current earnings multiple. Perhaps it was for the stock rallied to as high was 4.24 on 10th May 2006. Incredibly the stock then tumbled.

Gamuda's next earnings was made on 22nd June 2006. By the 14th June 2006, Gamuda had given back all its early gains. It reached a low of 3.02 on the 14th June 2006.

A buying opportunity?


One did not know how good or bad the earnings will be but one knew that Gamuda would be reporting its earnings that month. For a stock to tumble from 4.24 on 10th May 2006 to 3.02 on 14th June 2006 is simply worrying. In fact, it's rather scary.

Would one dared to invest in this stock? And if so, based on what?

On 22nd June, Gamuda announced a net earnings of 40.151 million. The drastic decline was more than clear.

How? Was there enough justifications to invest in Gamuda back in June 2006?

Well for those who dared to invest in Gamuda, they would be sitting pretty. Gamuda last traded on 5th Jan 2007 at 5.20. No risk, no gain huh?

Incredibly, right now, Gamuda's current earnings is now at 169 million. Gamuda now has 790 million shares, which means that its current earnings per share is now 21.4 sen. And at 5.20, Gamuda is now trading at a pe multiple of 24.2x.

For me, I could not find the window of opportunity to invest in this stock. Too bad.