Investment Highlights

• We maintain BUY on Gamuda with an unchanged SOPbased fair value (FV) of RM5.17/share. Our FV reflects a 3% premium for its 4-star ESG rating and implies a FY24F PE of 16x, 1 standard deviation above the group’s 5-year PE average of 14x.

• Gamuda has entered into a joint venture (JV) agreement for a 45% equity interest in UPP Holdings, together with Sabah Energy Corporation (40%) and Kerjaya Kagum Hitech JV (15%) to develop the Upper Padas Hydroelectric Power Plant, a hydroelectric dam to be located in Tenom, Sabah at a total cost of RM4bil.

• The proposed development of the hydroelectric power plant via a private finance initiative is expected to generate a maximum capacity of 187.5MW or up to 1,052GWh of clean energy per annum.

• Gamuda will finance the project by RM1.8bil with RM1.4bil from debt and the remaining RM0.4bil using internal funds.

• The construction of the hydroelectric power plant in Tenom and Sipitang districts of Sabah is expected to commence in the first half of 2024 over the next 5 years. The construction works alone is worth RM3bil, in which Gamuda and Kagum Hitech JV (KKHJV) would be the turnkey contractor.

• We expect the construction would contribute to an average profit before tax (PBT) of RM24mil per annum or 2% of FY24F PBT, assuming a 50% share for Gamuda.

• Post-completion of the construction, the JV partners will be running the operation with an initial 40-year concession period. The project IRR would depend on the finalisation of Power Purchase Agreement tariff rates with Sabah Electricity, which is expected over the next 6 months.

• However, we make no changes to FY24F-FY26F earnings as the award is within our FY24F replenishment assumption of RM13bil, in line with Gamuda replenishment target of RM25bil for the next 24 months.

• Looking ahead, we expect more contracts to be awarded to the group. These include MRT3, Penang LRT, Australia subs urban loop (SRL) 2nd Package and more quick turnaround projects (QTP) across regions.

• Key risks: (i) eroding margins from higher-than-expected construction costs and labour shortages; and (ii) shelving of mega projects.

• Gamuda is currently trading at an attractive FY24F PE of 9.8x, which is significantly below its 5-year average of 14x.

Source: AmInvest Research - 31 Oct 2023