• Gamuda formed a JVA for a PFI hydroelectric power plant project in Sabah.

• The project adds RM3bn to orderbook, strengthens ESG initiative and builds longer term recurring income base.

• Reiterate Add and SOP-derived TP of RM5.65

Formed JVA for a PFI Hydroelectric Power Plant in Sabah

• Gamuda has announced that a joint venture agreement (JVA) has been entered between itself, Sabah Energy Corporation (SEC) and Kerjaya Kagum Hitech (KKHJV) to form JV company Upper Padas Power Holdings Sdn Bhd (UPP, with the respective equity interests of 45%, 40% and 15%.

• The purpose of the JVA is to undertake a private finance initiative (PFI) to develop the Upper Padas Hydroelectric Power Plant, in Tenom, Sabah, with a planned maximum generating capacity of 187.5MW.

• The project is estimated to have a 5-year construction period starting 2024F and an initial operating period of 40 years. A power purchase agreement (PPA) would be entered into between UPP and the offtaker, Sabah Electricity Sdn Bhd. Gamuda said that it will make announcements on the tariff details and PPA developments once approval is obtained from relevant authorities; it plans to execute the PPA by 1HCY24F.

• The total project cost is estimated to be about RM4bn, including interest during construction.

Terms of the JVA

• UPP, the project developer, would be appointing a consortium comprising Gamuda and KKHJV as turnkey contractors for the project, which would use no less than 40% local Sabah contractors.

• Gamuda has the right to select UPP’s senior management team, consultants and advisors, in consultation with the other shareholders, while SEC would be entitled to select one senior management position.

• The JVA will become effective after approval of the relevant authorities, including Suruhanjaya Tenaga.

Venture Adds to Orderbook, ESG Initiatives and Recurring Income

• We understand from Gamuda that it would undertake the bulk of the construction works of more than RM3bn. With this, its YTD wins amount to c.RM6bn, bringing its outstanding orderbook to RM27.8bn. The company looks well on track to meet its RM25bn guidance of new orders for FY24-FY25F, in our view.

• As this is a PFI project, the project would be non-cashflow in nature over the construction period but would provide Gamuda with strong recurring income for more than 40 years post-2029F and help fill the void left by the sale of its toll road business in 2022.

• The JV partners plan to fund the project with a minimum debt-to-equity ratio of 80:20. There would be no impact on Gamuda’s balance sheet as it only has a 45% stake.

• According to the Sabah Energy Roadmap and Master Plan 2040, the state had a dependable capacity for electricity of c.1,180 MW as of 2021, with a 12% reserve margin. Hence, upon completion, this project would provide additional generation capacity of 187.5MW for Sabah, delivering up to 1,052GWh of clean energy p.a. Reiterate Add and SOP-based TP of RM5.65

• We reiterate Add, with an SOP-based TP of RM5.65. Its current valuations of 12x CY24F P/E and 1.0x CY24F P/BV (1 s.d. below 18-year mean) still look extremely compelling, in our view, considering its strong growth trajectory and record orderbook.

• Key downside risks: potential labour issues locally and abroad derailing its construction progress there, and delays in job awards. Re-rating catalysts are higher-than-expected new order wins, which will translate into better revenue and earnings.

Source: CGS-CIMB Research - 30 Oct 2023