As expected, Gamuda 2QFY23 core net profit chalked up 33.9% YoY despite having zero contribution from its highway assets. The Group recouped the earnings void left by the highway concession assets from its core division – revenue from the engineering & construction division grew 54.4% YoY. We deem 2QFY23 core net profit as broadly in-line with ours and consensus estimates, accounting for 49.5% and 48.3% respectively. However, we lift our FY23-25F earnings estimates by 33% on average to incorporate the acquisitions that took place prior to 2QFY23 i.e.: ERS Energy and DT Infrastructure (DTI) that lifted outstanding construction orderbook by 37.5%. Our Outperform call is affirmed, with a higher revised SOTP-based TP of RM5.10 (previously RM4.30).

• 2QFY23 revenue swelled 18.4% YoY. The Group’s engineering & construction division recovered strongly, up 54.4% YoY owing to higher revenue recognition from completed & near-completion projects i.e.: MRT2 (99.9% completed), Pan Borneo Highway Sarawak (89.7% completed) and overseas project from Australia, predominantly. Its property division however, fell 11.0% YoY due to weaker domestic property sales on the account of political uncertainty.

• Highway earnings void recouped. While operating cost has expanded 16.8% YoY, pre-tax profit managed to climb 23.7% YoY as revenue growth surpassed the growth of operating expenses (18.4% v 16.8% YoY), coupled with lower depreciation and cost of borrowing. This marks the earnings void left from the highway concession assets was recouped as expected, on the back of strong construction earnings.

• Outlook. While we may be bullish about the Group’s prospects, we wish to highlight our concern about its operations in terms of cashflow turnover as certain projects i.e.: Penang South Islands & Gamuda Land quick turnaround projects, require heavy capital spending. Overall, we reckoned Gamuda will continue to maintain its upward earnings trajectory given its current size of RM20.5bn orderbook which provides earnings visibility up till FY27, coupled with its RM5.4bn property unbilled sales.

• Active tender updates. On Australia tenders, the result of ~RM13bn Suburban Rail Loop will be announced by 1QFY24. On home ground, Environment Impact Assessment (EIA) approval for Island A Penang South Reclamation requires further evaluation, we expect the project to receive approval within 3QFY23. On MRT3, we expect award to begin in 2H2023. Package CMC303 aside, Gamuda has unveiled their interest participating in the systems turnkey tender worth c.RM4.6bn. Moreover, the Group has also submitted tenders for East Malaysia road projects, presumably the Pan Borneo Sarawak highway Phase 2 which award is anticipated next month.

Source: PublicInvest Research - 24 Mar 2023