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Hold
(unchanged)
TP: RM2.00
Current Price: RM1.95


 2QFY09 results could disappoint again, similar to the pattern seen in the recent 4Q08 results of construction groups.

 Double tracking project may see a VO, while SPLASH should remain in the limelight due to the government’s 31 Mar ’09 takeover deadline.

 Retaining our earnings forecasts pending results release. TP and Hold call are also unchanged.

Shortfall again? Gamuda's 2QFY09 results, due to be released at the end of this month, could fall below expectations. Recall that its 1QFY09 net profit of RM55m (-37% YoY, -22% QoQ) disappointed, and 2QFY09 net profit could show a sequential decline due to lower construction margins and slow property sales. Our current for FY09 net profit estimate of RM236m compares to the consensus’ RM264m. Indicatively, FY09 net profit could fall below RM200m (FY07: RM325m), which represents a potential downgrade of at least 15% from our estimate, and a significant 24% from consensus.

VO for double tracking project? Construction of the RM12.5b rail project (northern section) is largely on schedule with total completed works at 17.8% as at end-2008. We understand from MMC’s analyst briefing last week that the project may see a variation order (VO) to the tune of RM500m, raising total project value to RM13b. Elsewhere, there have been no developments at Nam Theun 1 (Laos), while details of the proposed RM30b Klang Valley LRT system, which Gamuda is eyeing, remain sketchy. Our view is that the entire development would be parcelled out in phases, with Gamuda having a good chance to secure a portion of the works, due to its strong delivery track record.

Water to hog the limelight. At 40%-associate SPLASH, we understand that there is some truth in recent press reports on Puncak Niaga Holdings exploring a takeover. Discussions are said to be (still) at a very preliminary stage. We expect the potential offer price for SPLASH to be higher than its book value (RM768m as at Mar '08, per audited accounts), but unlikely to match our full DCF value of RM2.5b (10.6% discount rate), which excludes operations and maintenance rights under Gamuda Water (80%-owned by Gamuda). SPLASH should remain in the limelight for a while due to the fast approaching deadline by the federal government to take over water assets in Selangor.

No change to forecasts. We maintain our earnings forecasts, pending the release of 2QFY09 results. Gamuda remains a Hold, with an unchanged target price of RM2.00 which is based on a 20% discount to its RNAV. Lower-than- expected 2QFY09 net profit would prompt us to cut our DPS forecast for FY09 – from 8sen presently. Meanwhile, we note that foreign shareholding has remained little changed, at still a high 45% as at Jan '09 vs. Nov ‘08.

Strength in Construction and Plantation Stocks. If there is any strength in the KLCI at all, it would come from the construction and plantation sector. Construction stocks like Gamuda and YTL have been trending upwards since October. The rally of construction stocks could be due to the upcoming UMNO elections next year as traders buy up politically linked counters. Some traders are also betting on the construction sector because of the historical inclination of the government to spend on construction projects to spur the economy during this phase of global economic malaise.

The plantation sector on the other hand is rallying because of the short term recovery of Crude Palm Oil (CPO) prices from a low of RM1,331 in 31st October to the current level of 1,576.

However, it must be noted that though these two sectors are trading promisingly above their short term line, a few negative black candles with long upper tails appeared in both charts,
signaling uncertainty and a possible correction or reversal from here on. After moving upwards for more than a month, these two sectors now face uncertainty ahead.

Strategy : Track construction and plantation stocks
Due to the uncertainty which clouds the two current strongest sectors in the KLCI, the bearish status quo remains for the KLCI
. It might also be prudent to track construction and plantation stocks at this point. You’ll never know when a ray of hope shines through – if construction and plantation stocks like YTL, Gamuda and IOI Corporation can manage to find strength in their reserves for a breakout, it might bring renewed strength in the KLCI.

A few key bluechips stocks are highlighted for your perusal.. The movements of these stocks will be crucial to the near term direction of the KLCI.

Commerz : Still down-trending
Bumiputra Commerce Holdings tried to breakout above its short term MAV line recently but failed. The failure of one of KLCI’s finance leaders to stage even a short term recovery does not bode well for the KLCI and finance stocks.
YTL : 2 month rally. Uncertainty ahead
.
YTL Corporation has been staging a rally from its September bottom for the last two months. This is due to its subsidiary YTL Power’s S$3.6B strategic
acquisition of the PowerSeraya power asset in Singapore. The rally of YTL could also be attributed to traders being attracted to the construction sector due to possible moves by the government to stimulate the local economy during these weak economic times. However, YTL is currently in the midst of a correction. If the correction continues further, it could already signal the end of YTL’s rally