Investment Highlights

• We maintain our forecasts but raise our fair value by 19% to RM3.68 (from RM3.08), after reflecting a RM1.68bil or 60sen/share valuation into its sum-of-part (SOP) fair value (Exhibit 2) following the latest development. We continue to value its existing construction business at 12x forward earnings, in line with our benchmark forward target P/E of 12x for large-cap construction stocks. Upgrade our call to BUY from UNDERWEIGHT.
• A joint venture (JV) between Gamuda Australia and Laing O’Rourke has been shortlisted for the first stages of the 50km Sydney Metro West project valued at A$20bil (RM60bil). The JV is one of three successful consortia shortlisted for the project’s first two major tunnelling packages, namely: (1) the 11km Central Tunnelling package from the Bays Precinct to Sydney Olympic Park; and (2) the 9km Western Tunnelling package from Sydney Olympic Park to Westmead (Exhibit 1). The other two finalists are John Holland, CPB Contractors and Ghella Australia JV and Acciona Australia and Ferrovial Australia JV.
• The Central Tunnelling package will go to one of the three finalists, and the two unsuccessful finalists for Central Tunnelling will then compete for the Western Tunnelling package. The first tunnel boring machine should hit the ground by 4Q2022.
• We believe the earnings potential from this project is hard to ignore given that:
  1. Mathematically, the Gamuda Australia-Laing O’Rourke JV stands a 67% chance of winning either one package; and
  2. Gamuda’s partner, i.e. UK-based Laing O’Rourke is a reputable name in the international construction scene with completed high-profile jobs such as the London 2012 Olympics and Paralympics, Heathrow Terminal 5, One Hyde Park and Aldar HQ (UAE) (the first spherical building in the Middle East.
• Given the highly competitive nature of the bids, Gamuda is unable to disclose the potential value of both the Central Tunnelling and Western Tunnelling contracts, as well as the equity structure of the Gamuda Australia-Laing O’Rourke JV.
•  Based on our back-of-the-envelope calculation, the construction cost per km is A$400mil (RM1.2bil). Assuming Gamuda’s effective share of work is 5km, this translates to a contract value of A$2bil (RM6bil). Assuming from here on, Gamuda is to find its footing in the Australian construction market with an annual net profit of RM140mil based on an annual turnover of RM2bil, a PBT margin of 10% and a tax rate of 30%, by applying the same 12x P/E, we value this “potential” at RM1.68bil.

Source: AmInvest Research - 28 Aug 2020