Gamuda the biggest beneficiary of new VOP rules

KUALA LUMPUR: Gamuda Bhd is the biggest beneficiary of the government’s latest move in revising the new variation of price (VOP) conditions for government construction jobs, said ECMLibra Investment Research.

“We are reviewing our earnings estimate and valuation for Gamuda Bhd with a possible upgrade,” the research house said yesterday, adding that Gamuda would benefit mainly from the RM6.3 billion design-and-build Ipoh-Padang Besar double tracking project.

ECMLibra Research had on its last report on Gamuda dated June 26, 2008 reduced the construction firm’s earnings estimate by 3.4% to RM324 million and 12.4% to RM389.7 million for FY08 to FY10 on the back of lower property sales and delay in the commencement of Nam Theun 1 hydropower project by another year.

The research house had also reduced Gamuda’s target price to RM2.85 from RM2.90 following the reduced earnings estimate, but reiterated a buy on the construction firm.

The Ministry of Finance had on Aug 6, 2008 released a circular on the revised VOP rules that include an enlarged VOP list.

The new items to be included into the VOP list are for civil engineering works rather than building works and there are six new items rather than 11 as previously stated.

The revised VOP list also qualifies mechanical and electrical (M&E) works for VOP claims and allows VOP for design-and-build contracts on the same basis as conventional contracts instead of just steel bars, even though the 50:50 risk sharing remained.

“Besides further liberalising the VOP claims, the government will also consider a three-month extension for projects which are on-going between Jan 1 and Aug 6,” said ECMLibra Research, adding that the new VOP would be backdated to Jan 1.

Nevertheless, the research house said that the outlook on the construction sector remained sluggish in the next six months on the back of the escalating construction cost arising from the recent fuel price hike and electricity tariff hike.

However, it said earnings momentum of the construction stocks under its coverage such as Gamuda, IJM Corporation Bhd and Sunway Holdings Bhd was still intact due to high proportion of construction order book from booming overseas market.

“As for stock pick, we favour IJM Corporation due to its significant plantation earnings and exposure to the more vibrant construction market in the Middle East and India,” ECMLibra Research said in a research note yesterday.

Shares of Gamuda, trading at a price-to-earnings ratio (PER) of 16 times, closed one sen higher at RM2.82 yesterday with a total of 3.1 million shares changing hands.

IJM, trading at PER of 11.3 times, closed 10 sen or 1.82% higher at RM5.60 with 777,500 shares trasacted.

Sunway closed 0.5 sen higher at 89 sen with 780,400 shares transacted. The counter trades at a current PER of 13 times.

By The EDGE Malaysia