More to Come Gamuda’s 1QFY23 net profit soared more than ten-fold QoQ as the Group reported one-off gain of RM1.1bn from its highway disposal and RM57m contribution from its sold highway assets. Excluding the highway disposal gain and contributions from the highway assets, core net profit was RM145m, representing 21% of our full year forecast of RM687.5m. 1QFY23 core net profit slumped 25.8% QoQ, attributable to lower revenue contribution from the engineering & construction (-22.1% QoQ) and property development segments (-38.3% QoQ). We deem 1QFY23 core net profit as broadly in-line with ours and consensus estimates, accounting for 21.1% and 20.6% respectively. While we see the earnings void left by concession has yet to be filled, we are not concerned as we expect earnings to pick up in the next quarter due to stronger property sales in 2H. To note, our projection has already imputed zero contributions from the highway assets. Hence, we maintain our earnings estimates and our Outperform call, with an unchanged SOTP-based TP of RM4.30.

• 1QFY23 revenue dropped 30.3% QoQ. The Group’s property development segment recorded the steepest decline at 38.3% QoQ due to depleted overseas property inventories which has resulted in lower sales, particularly Singapore and Vietnam. Moving forward, the segment will focus on building up its inventory via quick turnaround projects in its key overseas market i.e.: Australia, Singapore, UK and Vietnam which yield better margins and shorter holding periods. Meanwhile, its engineering & construction segment’s contribution also declined 22.1% QoQ as most of the projects were at their preliminary stage where earnings recognition is minimal except for MRT2 and Pan Borneo Highway Sarawak which are at 95% and 98% completed respectively.

• 1QFY23 pre-tax profit shrunk 30.4% QoQ. While operating cost has improved 29.4% YoY, the lower pre-tax profit is attributable to lower share of profit from joint ventures and associates which saw a decline of 43.3% YoY due to the absence of earnings from its highway concession assets as well as higher cost of borrowing and depreciation cost. We expect the earnings void left from the highway concession assets to be filled up eventually, on the back of strong property sales and construction earnings.

• Outlook. Gamuda anticipates the result of ~RM13bn Suburban Rail Loop by 2QFY23, having been unsuccessful in the RM6.1bn Northeast Link Road bidding. The Group acquired Tunnelling Solutions, an Australian expert in tunnel planning and construction, to fortify its supply chain in Australia. We understand that Tunnelling Solutions is also an appointed contractor under Gamuda and Laing O’Rouke Consortium of the Western Tunnelling Package for the Sydney Metro project. With Australia making up more than 50% of its current orderbook, the country will continue to be an anchor to its orderbook for at least 4 years, owing to Australia’s explosive infrastructure development. 
  On Malaysia, the Island A Penang South Reclamation worth RM4bn is currently on final public display stage. We expect the project to kick-start in 3QFY23, should approval be obtained by 2QFY23. That aside, MRT3 is still pending award. To recall, new wins in FY22 amounted to RM11.7bn. Given Gamuda’s RM20bn (currently RM14.8bn) target of construction orderbook by FY23, we opine that the orderbook target is understated due to the scale of the projects the Group is bidding for.
• Dividend. Management declared a single tier special dividend and first interim dividend of 38sen and 6sen respectively, per share this quarter, rendering a dividend yield of 12.2% at current share price.

Source: PublicInvest Research - 19 Dec 2022