Investment Highlights

•  We keep our FY22–23F net profit forecasts relatively unchanged, but fine-tune our fair value (FV) based on “sum of parts” (SOP) (Exhibit 3) by 3% higher to RM3.27 (from RM3.16), valuing its 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 FV adjustment for ESG based on our 3-star rating (Exhibit 6). Maintain HOLD.

• Gamuda's FY21 net profit beat our forecast and the consensus estimates by 18% and 20% respectively. We believe the key variance against our forecast came largely from: (1) lumpy profit recognition from phase 1 of the MRT2, i.e. the northern stretch, on hitting a significant billing milestone and account finalisation; and (2) lumpy billings from property sales in Vietnam.

• Its FY21 core net profit rose 12% YoY driven largely by bumper construction and property profits in 4Q, partially offset by weaker concession earnings as toll roads suffered reduced traffic amidst movement restrictions.

• Gamuda registered RM2.87bil property sales in FY21, up 32% vs. RM2.18bil a year ago, underpinned largely by overseas projects (mostly in Vietnam and Singapore) (61%) with the balance coming from the local township projects. It guided for RM3.5bil property sales in FY22F.

• Key highlights from the briefing yesterday are:
  1. Gamuda acknowledged that the MRT3 project is not mentioned in the just announced 12th Malaysia Plan. It believed that this is understandable given that the focus of the government’s fiscal operations is on helping the low-income group, instead of announcing mega projects (that may be perceived to be lavish);
  2. Gamuda has made inroads into the property market in the UK (Exhibit 2). Similar to what Gamuda does in Singapore, it takes a backseat and appoints local “development managers” with stronger knowledge of the local market to run the show (including design, marketing and construction).
  3. In Australia, it is now pinning its hopes on two remaining tenders, namely:
     1. the Western Tunnelling package of the A$20bil (RM60bil) Sydney Metro West project, from Sydney Olympic Park to Westmead (9km), via a JV with prominent UK-based international contractor Laing O’Rourke. The winner for the job could be announced in Dec 2021; and
     2. the Greater Western Sydney–Western Sydney International Airport metro line, via a JV with reputable Australian contractor John Holland. The winning bid is expected to be unveiled in Feb 2022.
  4. For the Penang Transport Master Plan (PTMP) project, Gamuda said that the project has been pushed back by eight months following an unfavourable court ruling. A judicial review has been initiated to overturn the court ruling. Concurrently, Gamuda is also making a fresh environment impact assessment (EIA) submission as a back-up plan. We are at best neutral on Gamuda’s decision to put its balance sheet behind Island A of the project. On one hand, this enables the project to finally get off the ground and the immediate realisation of a RM5bil order book for Gamuda. However, Gamuda investment of RM6–7bil bet on reclaimed land in Penang Island is very significant as compared with the company’s market value of about RM7.5bil currently.
• We remain cautious on the local construction sector. In the newly unveiled 12th Malaysia Plan, development expenditure in 2021–2025 is projected at RM400bil, vs. RM248.5bil spent under the 11th Malaysia Plan (20162020). However, the spending is likely to be backloaded, i.e. with higher allocation only from 2023 when Covid-19 related spending begins to taper. Also, other macro and operational challenges remain aplenty in the sector including high national debt, contractors having to take on operating/commercial risks of mega projects by virtue of a public-private partnership model, intensifying competition (amidst growing presence of foreign contractors especially large state-owned Chinese contractors), and higher operating cost and risk, lower efficiency and supply-chain disruptions as the pandemic rages on.
• The outcome of the PTMP project thus far (i.e. the implementation model for Island A) could have been better. However, Gamuda could still spring a surprise or two if it wins sizeable jobs in Australia, or if the Malaysian government decides to pump prime the economy via the implementation of mega public projects despite the high national debt. At about 13x forward earnings and with a significantly riskier earnings profile now, we believe Gamuda’s upside is capped.

Source: AmInvest Research - 30 Sept 2021