Investment Highlights

• We maintain our forecasts and fair value of RM3.49 based on “sum of parts” (SOP) (Exhibit 1), valuing Gamuda’s construction business at 13x forward earnings. This is at a slight discount to our benchmark forward target PE of 14x for large-cap construction stocks, to reflect the increased risk of its order book (that includes a sizeable self-funded reclamation project). There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 5). Maintain HOLD.

• Gamuda, via a 50:50 JV with Kerjaya Prospek, has won a RM202.6mil contract for the construction of Gurney Marine Bridge (linking Jalan Gurney to the Seri Tanjung Pinang Phase 2) and related works. The construction period is 30 months commencing May 2021.

• To put things in perspective, the latest contract is almost negligible vs. Gamuda’s construction churn rate of about RM1bil per quarter currently. Gamuda’s half share of the job shall marginally increase its outstanding construction order book to RM5.6bil from RM5.5bil (Exhibit 2). Also, based on our estimates, the latest contract shall boost its FY22–23F earnings by 0.5% each, which is immaterial and hence we maintain our forecasts.

• We maintain our view that the outcome of the Penang Transport Master Plan (PTMP) project thus far (i.e. the contractor-funded model for Island A) is not the best investors could have possibly hoped for. However, Gamuda could still spring a surprise or two if it wins sizeable jobs in Australia, or if the MRT3 project does commence work in the second half of the year, in accordance with the government’s plan currently.

• However, the fact remains that the government has very limited room for fiscal manoeuvre given the elevated national debt, weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic.

• At 15–16x forward earnings and with a significantly riskier earnings profile now, we believe Gamuda’s upside is capped.

Source: AmInvest Research - 27 Apr 2021