Gamuda has executed a subscription and shareholders agreement (SSA) to acquire a 30% equity interest in ERS Energy SB (ERS) via subscription of 4.29m new ordinary shares for a total cash consideration of RM200m. We are enthused by this development as this marks the first commercial venture of the Group into the renewable energy (RE) space. Though earnings contribution from ERS may not be material at this juncture, we think the acquisition will accelerate and enhance Gamuda’s Green Plan vision – to grow RE asset portfolio to a capacity exceeding 800MW by FY2025. Purchase price is deemed fair, translating to forward PE multiple of 13x. We expect earnings to improve marginally by about 2%, after accounting for ERS’ earnings contribution to the Group, in FY24 and FY25. We retain our earnings estimates for now, pending completion of the deal by 3QFY23. Our Outperform rating with an unchanged sum-of-the-parts derived TP of RM4.30 is maintained.

• On ERS Energy. The company is established in 2009, is a leading solar energy Engineering Procurement Construction and Commissioning (EPCC) company and one of the early entrants to the solar scene in Malaysia. ERS’ main business scope is solar photovoltaics (PV) EPCC and system integrations with capability from small to large-scale deployment, including residential, commercial and industrial, and utility scale projects. It is now one of the largest solar EPCC players in Malaysia and the region, with a total project experience of close to 700MW completed large-scale solar projects not just at in Malaysia but also in Vietnam and Philippines.
  ERS also operates business units focusing on electric vehicle charging solutions, operation and maintenance of solar PV systems, solar PV energy storage solutions, trading and wholesaling of solar PV equipment. ERS is currently partners with Gamuda to develop a 39MW solar power plant in NEDA Pekan SB under the New Enhanced Dispatch Arrangement (NEDA) framework. Upon completion of the acquisition, apart from the 30% stake in ERS Energy, Gamuda will also effectively hold 64% of shareholdings in NEDA Pekan (refer figure 1 below).

• Fair valuation. The acquisition price tag of RM200m in ERS translates to a forward PE multiple of 13x which rendered a discount to the acquisition price tag given that its peers’ forward PE multiples were at 19x. We deem the price fair as ERS may carry a higher execution risk as compared to its listed peers with regards to its ability and credibility.

• Financial effect. As per management’s guidance, ERS will be looking at 20-30% growth per annum beyond FY23F. We expect the associate company to contribute RM12.9m and RM15.5m to the Group’s FY24F and FY25F net profit respectively, representing increments of about 2%. Nevertheless, the acquisition will be fully satisfied via internally generated funds, the Group has RM2.8bn cash-in-hand as at 2HFY22. On top of that, net gearing will slightly increase from 0.19 to 0.21 post acquisition, after incorporating a reduction of RM200m cash for the payment of the acquisition.

• What we think. We are enthused by this development as this marks the first commercial venture of the Group into the renewable energy (RE) space. Though earnings contribution from ERS may not be material at this juncture, we think the acquisition spearheaded Gamuda’s Green Plan – to own over 800MW RE asset capacity by FY2025 and be Malaysia’s largest private RE producer.

Source: PublicInvest Research - 8 Dec 2022