RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of the debt programmes of Gamuda Berhad (or the Group) and its wholly owned subsidiary, Bandar Serai Development Sdn Bhd (refer to Table 1 below).

Published on 02 December 2016

RAM Ratings has reaffirmed the AA3/Stable/P1 ratings of the debt programmes of Gamuda Berhad (or the Group) and its wholly owned subsidiary, Bandar Serai Development Sdn Bhd (refer to Table 1 below).

A leading local contractor, Gamuda has a well-established position in large-scale civil-engineering projects. Its credentials include its dual roles in the Klang Valley MRT (KVMRT) project, of which Line 2 is currently in the early stages of construction. Gamuda, as project-delivery partner (PDP), has been largely successful in delivering the KVMRT Line 1, to date 92% completed within the agreed target cost and timeline. Its risks as the PDP for Line 2 should stay manageable as a sizeable portion of the jobs has been awarded to experienced contractors. Meanwhile, Gamuda has substantially restored its order book with the massive underground work package for Line 2. Its order book stood at an impressive RM8.9 billion as at end-July 2016 (or RM19.3 billion, inclusive of PDP fees). Even so, the Group still aims to participate in other jobs, which should provide project diversification from its exposure to the KVMRT lines.

Gamuda’s property sales recovered to RM2.1 billion in fiscal 2016 (fiscal 2015: RM1.2 billion), despite still-soft local sales. Overseas jobs had provided the boost, mostly from its maiden high-rise project in Singapore. Elsewhere, sales in Vietnam have been experiencing a resurgence since the previous year, and overseas sales could contribute about half of Gamuda’s property sales next year. The Group has invested heavily in the development of new townships, with an average of RM670 million of cash outflow over the past 2 years for land acquisitions. New local townships projects soon to be launched may take time to mature; lower earnings in the nascent stages may exert pressure on the Group’s property earnings and margins. 

In FY Jul 2016, Gamuda’s pre-tax profit weakened to RM780.7 million (-9% y-o-y). Its construction and property divisions had both softened. For the former, earnings had declined as work on Line 1 had tapered off; the latter had been the result of the soft property market in Malaysia. That said, the decline in its bottom line was cushioned by the better showing of its expressway investments. Moving forward, given the loss of earnings of Syarikat Pengeluar Air Selangor Holdings Berhad (SPLASH) with the potential sale in FY Jul 2017, we anticipate Gamuda’s profit performance to only pick up pace in the following year alongside the ramping up of construction work on KVMRT Line 2.

In the meantime, Gamuda’s funds from operations debt cover (on a pre-FRS 11 basis where its incorporated joint ventures are included) was unchanged at 0.15 times in FY Jul 2016. Amid rising debt levels, however, the Group’s gross gearing ratio nudged up slightly to 0.67 times as at end-July 2016. Under pre-FRS 11, this ratio would be higher at 0.70 times, although net of its large cash and liquid assets, this ratio would improve to 0.48 times. Elsewhere, we note that an extension of time has been granted for negotiations on the sale of SPLASH, for which Gamuda expects to conclude by next year.

Table 1: Issue ratings of Gamuda and Bandar Serai Development

Entity	Issue	Rating
Gamuda Berhad	RM800 million IMTN Programme (2008/2028) RM800 million IMTN Programme (2013/2038) RM100 million ICP Programme (2013/2020)  (with combined limit of RM800 million) RM5 billion IMTN Programme (2015/2045) RM2  billion ICP Programme (2015/2022) (with combined limit of RM5 billion)	AA3/Stable AA3/Stable P1 AA3/Stable P1
Bandar Serai Development Sdn Bhd	IMTN Programme of up to RM1 billion (2014/2044)  7-Year ICP Programme of up to RM500 million (with combined limit of RM1 billion)	AA3(s)/Stable P1(s)

Analytical contact                                        Media contact
Karin Koh, CFA                                              Padthma Subbiah
(603) 7628 1174                                             (603) 7628 1162
karin@ram.com.my                                        padthma@ram.com.my