Investment Highlights

• We maintain our HOLD call and keep relatively unchanged our forecasts and fair value (FV) of RM3.28 based on “sum of parts” (SOP) (Exhibit 2), 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).

• Gamuda is acquiring a 13.8-acre residential land plot known as UG5.6 Land in Binh Duong New City for US$53.9mil or VND1.25tril (RM228.5mil). The 2,600-acre Binh Duong New City, located at about 38km north of the CBD of Ho Chi Minh City (HCMC), is the new administrative centre of Binh Duong province (Exhibit 1). Gamuda intends to build 349 units of townhouses and shophouses on the land with a total GDV of US$117mil (RM495mil). In terms of timing, Gamuda said that the project will be “market-driven”.

• At about US$90 per square feet (psf), Gamuda is acquiring the land at a slight 4% discount to independent valuation of US$93 psf. Our quick checks revealed that asking prices for vacant land plots in Binh Duong province range from US$20 psf to US$45 psf. We believe these may not be good comparisons given that they are largely small land plots scattered around older neighbourhoods with limited town planning.

• The acquisition will increase Gamuda’s net debt and gearing at RM1.7bil and 0.18x as at end-FY21 to RM1.9bil and 0.21x respectively that are still highly manageable.

• We are mildly positive on the latest development that will boost Gamuda’s outstanding GDV in Vietnam by 5% to RM11.3bil (which in turn makes up 20% of Gamuda’s total outstanding GDV of RM56.5bil). Given the relatively small GDV, the project will not have any material impact on Gamuda’s earnings.

• 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 (2016– 2020). 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 lingers on.

• Gamuda’s implementation of Island A of the Penang Transport Master Plan (PTMP) project has been delayed 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 backup plan. 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 13–14x forward earnings, we believe Gamuda’s upside is capped.

Source: AmInvest Research - 20 Oct 2021