Investment Highlights

• We upgrade Gamuda to BUY with a higher SOPderived fair value (FV) of RM4.73/share (vs RM4.10/share previously) to account for the strong growth in its construction & engineering segment.

• Our FV reflects a 3% premium for its 4-star ESG rating and implies an FY24F PE of 13.8x, within one standard deviation above its 5-year average of 12x.

• We raise Gamuda’s earnings forecast for FY24F by 17% and FY25F by 15% to account for the higher order book underpinned by the acquisition of Australian assets. The additional order book is expected to be AUD2bil (or RM6bil) over an average of 3 years.

• Gamuda, via DT Infrastructure Pty Ltd (DTI), its wholly owned foreign sub-subsidiary in Australia, has proposed to acquire Australian transport project business (Downer Transport Project, DTP) from Downer EDI Works and VEC Civil Engineering (collectively referred to as Downer) for an enterprise value (EV) of AUD212mil (or RM636mil).

• DTP is a direct business unit under Downer providing civil construction services in delivering transport projects smaller than AUD800mil for its customers, with specialist rail capability. It operates across Australia, mainly in Western Australia, New South Wales and Victoria, which account for 43%, 32% and 21% of FY23F revenue respectively.

• The EV – derived from 4x maintainable EBITDA of AUD53mil – will be fully funded by Gamuda’s existing funds. We deem the acquisition price as fair, which translates to a PE of 7.5x. With an estimated timeline for completion in 2Q2023, the proposed acquisition is expected to contribute positively to Gamuda’s earnings from FY24F onwards.

• Although the acquisition is conditional upon the satisfaction of customary conditions for a transaction of this nature, including the approval of the Foreign Investment Review Board of Australia (FIRB), we are positive that Gamuda would be able to satisfy these conditions.

• To manage key personnel risk, both Gamuda and Downer have put in place incentive schemes for the staff to stay on.

• By acquiring DTP, Gamuda will be able to tap into the Australian market more effectively given DTI’s widespread reach in the country. Also with DTI, Gamuda will be able to tap into small/mid-sized projects (<AUD800mil). Currently, Gamuda Engineering’s (Australia) (GEA) projects are more than AUD800mil in size. In addition, GEA and DTI may jointly bid for Sydney Metro West and Suburban Rail Loop East projects.

• Looking ahead, we believe Gamuda stands a good chance to secure a slice of the Suburban Rail Loop (SRL) East project. The first contract (between Cheltenham and Glen Waverly) is expected to be awarded in June 2023, while the second contract (between Glen Waverly and Box Hill) in 2H2023. There will be an individual winner for these 2 projects from the 3 bidders that were shortlisted.

• Domestically, potential jobs includes CMC303 of MRT3 and Penang South Island Project. We expect more clarity from these projects post re-tabling of Budget 2023.
  • MMC-Gamuda’s bid for CMC303 is lowest amongst its peers at RM13.3bil. Currently MRT Corp is conducting a detailed and comprehensive study on the proposed MRT3 alignment including suitability of realignment. While we think a major realignment is unlikely, the project may be downscaled as government seeks to reduce the cost for the project.
  • Penang South Island (PSI) project, previously guided at RM5bil. The project is pending approval of Environmental Impact Assessment.
• We view Gamuda as attractive given the potential upside of 16.5% to our revised fair value. It is also trading at 11.9x FY24F PE, below its 5-year peak of 15x.

Source: AmInvest Research - 23 Feb 2023