More on what the folks at JP Morgan said about Gamuda

Many are rather shocked at the low valuation given by JP Morgan on Gamuda.

I was fortunate enough to get a copy of that report in my mail.

Here is a snippet of what's said.

• What are the implications?
  We are extremely doubtful of the company’s future, and highlight all the uncertainties pertaining to the business operations going forward:
  
  • Who will be running the company going forward? The absence of a significant shareholding in the company will not act as an incentive for the managing director to secure more contracts / adding value to the company. His role as an advisor / board member will be rather pointless from the perspective of a minority shareholder. After all, if he is hypothetically still able to deliver value by serving as an advisor/director, why should he dispose of his stake? We also see no significant figures among internal management who can carry on the legacy of the company.
  
  • Could the exit jeopardize all of Gamuda’s ventures in Vietnam? Gamuda has a total of GDV exposure of c.M$15 billion in Vietnam, of which the Yen So project makes up c.M$11 billion (after revaluation), and the remaining balance being in the Long An Project, with a potential GDV of c.M$4 billion. Given the long gestation period of all these projects, as well as the uncertainties surrounding the execution risks, we question the materialization of these projects in Vietnam
  
  • Any risk on the existing construction orderbook? With an existing outstanding orderbook of c.M$10.5 billion, we highlight the possibility of certain contracts either being reneged / revoked. For instance, the M$2 billion project to develop the Laos Nam Theun Hydropower Plant has been stalled for several years, and may not even take-off eventually.
  
  • Could there be problems in the Double-tracking project? The M$12.5 billion Double-tracking project was secured on a fixed-price basis, implying that any cost escalation relating to materials will be absorbed by the contractors. While we are not aware of any hedging programmes to cap the cost of materials, we see a strong potential for margin compression, on the back of cement, steel, coal and fuel price hikes. Furthermore, the pressure from the Malay Chamber of Commerce Malaysia (MCCM) to apportion 30% of the subcontracting to bumiputra-contractors could also pose more risk to the entire project execution.
  
  • Any chance of project replenishment in the future? We believe that the chances of securing federal-funded Malaysian projects as well as foreign projects moving forward will be very slim, given the absence of the well-connected founder.
  
  So what’s next?
  Given that there is no immediate successor within the internal management of Gamuda (at least no one of the caliber of the ex-founder); we see a limited shelf life in the company going forward.
  
  However, we see three events that could materialize subsequent to the exiting of the founder.
  
  1. Another major shareholder selling? Based on the most recent disclosure on Bursa, dated 21 February 2008, Raja Dato’ Seri Eleena Azlan Shah still has an effective stake of 7.84% in Gamuda. Being an active partner to Dato’ Lin, there could be a possibility of her disposing of her stake in the company as well.
  
  2. A takeover in the brewing? Could it be that the founder cashed out in anticipation of a hostile takeover? Even in the absence of a hostile takeover, Gamuda is still a good acquisition target, in our view, given that it is well supported by the infrastructure assets (three toll highways and a water concession in Malaysia), an exciting Vietnam property story, as well as a robust construction orderbook. However, this hypothesis banks on the emergence of value in the company, which at a CY08 P/E of 22x is still a major hurdle for most companies.
  
  3. Talent-pinching from other companies? The new talent to replace Dato’ Lin would have to be equally as “connected” in order to replicate the success of Gamuda, especially in securing construction projects both in Malaysia and overseas. However, we attach a low probability for this to happen.
  
  Maintain earnings for now, but the uncertainties warrant a discount
  
  Theoretically, the company should cease to be valued as a ‘going concern” given the uncertainty of the future. The earnings growth outlook remains bleak for Gamuda, and even the high dividend yield is premised on a steady income stream from existing operations. We foresee the business to undergo an inflection point, and there is no certainty of business continuity going forward.
  
  Theoretically, the company should now cease to be valued as a “going concern” given the uncertainty of the future. We reduce our Jul-08 PT to M$3.30, applying a 25% discount to our SOTP of M$4.40, to penalize the company for an absence of business direction. We maintain our earnings estimates for now, as we seek more guidance from management on the firmness of the orderbook and property launches.
  
  While a potential M&A deal could be an upside risk, we reiterate Gamuda as a top stock to avoid for 2008.

That's their resoning given. They fear the uncertainties and more importantly they feel that perhaps there is a lack of business direction.

How? Do you reckon that their reasonings for concern were valid?

One thing to note though, I would like to expand on the issue about another shareholder disposing their shares. Yes, Raja Dato’ Seri Eleena Azlan Shah has been disposing her shares but if one would track the historical records of the announcements made on Bursa Malaysia, one would have clearly noted that she has been disposing her shares in small bits forever.

For example, here is her most recent disposal announcement: Changes in Sub. S-hldr's Int. (29B) - Raja Dato' Seri Eleena Azlan Shah, in which she disposed only 700,000 shares.

And the other disposal of shares this year was Changes in Sub. S-hldr's Int. (29B) - Raja Dato' Seri Eleena Azlan Shah, where she disposed 200,000 shares.

A total of 900,000 shares. A lot?

And here are some transactions recorded in 2007.

This was on Oct 2007. Changes in Sub. S-hldr's Int. (29B) - Raja Dato' Seri Eleena Azlan Shah (it indicated the amount of bonus shares she received)

Her disposal in Oct 2007 Changes in Director's Interest (S135) - Raja Dato' Seri Eleena Azlan Shah, she disposed a total of 500,000 shares.

Her disposal in June 2007. Changes in Director's Interest (S135) - Raja Dato' Seri Eleena Azlan , she disposed a total of 300,000 shares.

Another disposal in June 2007. Changes in Director's Interest (S135) - Raja Dato' Seri Eleena Azlan Shah, where she disposed another 200,000 shares.

I could go on and on. And one of the older ones in 2002, inidcated she disposed 220,000 shares in the following announcement. Changes in Sub. S-hldr's Int. (29B) - Raja Dato' Seri Eleena Azlan Shah

How?

Would you read too much in her disposal of shares?

Here is a snapshot of that said report.

Meanwhile, the StarBiz carried the following interview: Gamuda starts working on succession plan

• Describing Gamuda’s prospects as “good”, Lin is confident the group would be able to meet all “the guidance that it had given to analysts earlier”.
  
  He denied market talk that his share sale was due to any adverse changes on the group’s fundamentals or earnings prospects.
  
  “I brought up the company over the past 25 years. I certainly don’t intend to have an abrupt exit ... we will ensure that over the next five years or longer, there will be a smooth transition,” Lin told StarBiz yesterday.
  
  He said he could foresee the day Gamuda would be run by professional managers who were not shareholders.
  
  “There are two or three names who have the potential (to take over the top executive positions),” he added.
  
  Lin trimmed his stake to 1.7% from 5.2% last week. The shares were placed out to global institutional investors.
  
  The share sale sparked heavy sell down on Gamuda shares amid worries that the group’s prospects would not be as rosy if Lin exited. HLG Securities anlayst Teoh Paul Keng noted that the rate Gamuda replenished its order book had decelerated. “The group has not secured anything substantial besides the double tracking project,” he said.
  
  The group’s order book ballooned to RM11bil after it bagged the double tracking project together with MMC Corp Bhd.
  
  The share price tumbled to a low of RM3.20 – down nearly 40% from its recent high of RM5.30. It closed at RM3.92, up six sen yesterday.
  
  “I didn’t expect the (market) reaction to be so strong,” Lin said.
  
  Lin noted it was “unfortunate” that investors perceived the “18-month lock-in period” for his remaining stake as a sign that he would only stay on for that period.
  
  He pointed out that this was the fourth time he sold down his stake in Gamuda.
  
  “Over the last 16 years, it (the selling down) hasn’t affected my commitment to grow the company and make it a success,” he said.
  
  Lin stressed he had never been the controlling shareholder. He was holding about 16% stake when Gamuda floated its shares on Bursa Malaysia.
  
  “There are lots of rumours flying around, such as our Vietnam project is not doing well and I have health problems.
  
  “My plan to sell shares has nothing to do with what is being speculated. It is mainly for estate planning purposes,” said Lin, adding that the share sale was to diversify his personal wealth.
  
  “But I suppose for the investors, there is never (a good) time for the CEO to sell shares,” he quipped.
  
  Lin refuted market talk that he sold shares because Gamuda was under pressure from the Malay Chamber of Commerce in terms of distributing 30% of the sub-contracts to bumiputra contractors. “That issue has been resolved to our (Gamuda’s) satisfaction,” he said.
  
  On the outlook of the construction sector, Lin said it would still be “quite good” for the next few years and there was no sign of a downturn.
  
  But in terms of the number of jobs being dished out, Lin opined it would be the same as in the past two years.
  
  “The slowdown in the US would trigger the need for the Government to pump prime (the economy) a bit more.
  
  “You will have some big ticket items to be rolled out from the development of the economic corridors,” he added.

And the BusinessTimes carried the following speculation: Gamuda may sell Splash stake, privatise Litrak and in another article on Business Times, Gamuda not under probe: SC