Gamuda is acquiring an Australian transport project business company, DT Infrastructure (DTI) from Downer EDI Works and VEC Civil Engineering for AUD212m (c. RM636m) via cash and borrowings. We view the acquisition of DTI as strategically fitting, in tandem with Gamuda Engineering’s vision to achieve AUD6bn (c. RM18bn) orderbook target from Australia in FY23-FY24F. Post acquisition, DTI will add approx. 37.5% (AUD2bn or equivalent to RM6bn) to Gamuda’s current construction orderbook of RM16bn while net gearing is estimated to increase from 0.2x (as at 1QFY23) to 0.25x. Our analysis shows that DTI could contribute an average of c.10% to the Group’s bottomline in FY23-25F. Nonetheless, we maintain our FY23-25F earnings forecast unchanged pending the deal completion by 2QFY23. Our Outperform call is affirmed with an unchanged sum-of-the-parts TP of RM4.30.

• About DTP. A business unit under Downer EDI, an Australian listed integrated services company, that provides civil construction services in delivering transport projects with specialist rail capability. DTI operates across Australia and primarily generates revenue from government clients, with a smaller share coming from private projects. Its customer base, contacts and geographical exposure are mainly in New South Wales, Western Australia and Victoria. Some of the key projects currently carried out by DTI are in relation to rail line upgrades & duplication, rail extension, rail maintenance, service signalling and communication maintenance and freeway upgrades.

• Rationale of acquisition. DT Infrastructure (DTI), being an Australian homegrown company, will enhance Gamuda Engineering’s client base and render immediate new market such as New South Wales, Western Australia, Victoria and Queensland in Australia. Besides, the Management suggested a joint venture between Gamuda Engineering Australia (GEA) and DTI to bid for upcoming Australia infrastructure projects without the need to partner with other Tier 1 Australian contractors. It is notable that the acquisition comes with no liability apart from GEA assuming DTI’s employee obligations, guarantee for payment obligation and performance guarantee associated with current projects. We also understand that the acquisition includes a two year full warranty in addition to indemnity in respect of specific losses. DTI is expected to generate a 9% YoY revenue growth in FY23.

• Reasonable price tag. The purchase price of AUD212m or equivalent to RM636m translates to an EV/EBITDA multiple of 4x which represents a discount to the acquisition price tag based on DTI Australian peers’ EV/EBITDA multiple of 13x. We deem the price tag fair as DTI’s parent, Downer EDI is currently streamlining its business thus, selling its non-core business units. The acquisition would be funded via cash. To recap, Gamuda has a cash pile of RM2.8bn and a net gearing of 0.2x, post ERS Energy and Gamuda Gardens land acquisition, as of 1QFY23.

• Our thoughts. We view this acquisition strategically fitting, in tandem with Gamuda Engineering’s vision to achieve AUD6bn (c. RM18bn) orderbook target from Australia in FY23-FY24. Post-acquisition, DTI will add approx. 37.5% (AUD2bn or equivalent to RM6bn) to Gamuda’s current construction orderbook of RM16bn while net gearing is estimated to increase from 0.2x (as at 1QFY23) to 0.25x. Our analysis shows that DTI could contribute an average of c.10% to the Group’s bottomline in FY23-25F.

Source: PublicInvest Research - 23 Feb 2023