We reinstate coverage on Gamuda with BUY rating and TP of RM4.15. Post going ex. yesterday, stock’s valuation looks attractive at FY23/24/25 P/E multiple of 12.8x/11.3x/9.9x (-0.5SD) and P/B multiple of 0.9x (-0.5SD) despite still being in a contract upcycle. We expect further orderbook growth to be underpinned by opportunities in Australia and selective opportunities domestically. Our earnings forecasts suggest a slight dip in FY23 before rebounding in FY24-25 driven by ramp up of its RM15.3bn orderbook and recognition of record high unbilled sales of RM6.2bn. Key catalysts include contract wins. Risks: project delays, execution in new markets, prolonged elevated materials prices, labour shortage and health of property market.

Post Lifting of Restriction, We Resume Coverage on Gamuda With the Following Updates:

Special div went ex. Gamuda’s 38 sen per share special dividend to shareholders went ex yesterday, marking an end to its toll disposal chapter. The stock price has adjusted by a smaller quantum.

Morphing to a regional contender. Perhaps the most instrumental development towards securing its longer term future is the successful penetration to the robust construction market in Australia (see Fig 5). The firm has secured two projects which are Coffs Harbour Bypass (AUD675m; 50% stake) and Sydney Metro West tunnel (AUD2.16bn; 100%). The projects feature tunnelling scopes of 1km and 9km respectively. Scope of work there is not new to Gamuda given its wealth of heavy engineering experience, however growing its construction orderbook in RM terms does become easier. Gamuda is currently in the running for Suburban Rail Loop East tunnel packages having lost out on the North-East Link road project. Historically, Gamuda boasts an approximate ~10-20% win rate in Australian project tenders, by our estimates. Australia aside, we see Gamuda’s first major foray into SG railway construction through its Cross Island Line (Phase 1) Defu underground station and tunnels contract (secured in 2021) as key towards enhancing its regional reputation, considering the intense global competition in SG. Overall, Gamuda’s fruitful regionalisation of its construction operations (~78% of orderbook) significantly reduces reliance on Malaysia’s construction market notorious for policy flip-flopping and facing declining fiscal headroom.

Heads and shoulders above. Domestically, Gamuda remains a heavy engineering powerhouse boasting an unrivalled track record in mega projects. Nevertheless, it is heavily reliant on sizable projects and the pipeline is therefore more sensitive to Malaysia’s fiscal capacity. Some of the yet to be awarded mega projects the company could secure work from are MRT CMC303 (RM10-15bn: 100%), PSR reclamation turnkey (RM6-7bn) and SMART2 (>RM5bn). All of which have elements of PFI like deferred payments and possible land swap. Our base case for the MRT3 is a cost review which could typically take 3-6 months, possibly delaying awards to mid-2023. We believe SMART2 will have to start from ground zero with the new government while PSR developments could be gradual. Though Gamuda has diversified geographical exposure, its track record positions the company on the front seat for domestic mega jobs.

Property to partly fill void but near term challenges emerging. Over the past year, its property division has benefitted from low interest rates resulting in strong sales momentum across its portfolio with FY22 sales coming in at RM4.01bn. Notable sales growth was seen in project like Gamuda Cove (+2.5x), Gamuda Gardens (+53%), OLA (+82%) driving unbilled sales to a record high of RM6.2bn (+35%). Management’s sales targets for FY23 and FY24 are at a lofty RM4.5bn and RM6.0bn respectively. Gamuda has identified a slew of quick-turn around property projects (QTPs) anchored by major townships overseas to partly fill in the earnings void left by highway disposals (5 year average net profit ~RM170m pa). Out of the RM1.5bn QTP sales targeted in FY23, 2/3rd comes from Ho Chi Minh, VN. While the long term prospects of real estate in VN is bright, near term weakness has started emerging post commencement of rate hike cycle in Sept-22.

RE. Gamuda recently invested RM200m in return for a 30% stake in ERS Energy, mainly a solar EPCC player (orderbook: RM1.4bn) at a 20-30. The acquisition gives Gamuda an effective 64% in NEDA Pekan (39MW). This is part of the company’s medium term RE strategic goal of owning 800MW of RE assets, having set aside RM2.0bn for this purpose. Gamuda also intends to pivot into pumped hydro projects in Australia with near term target being one in Tasmania, AU. The RE asset portfolio is expected to generate recurring income over the long term.

Forecasts. We introduce FY23/24/25 core PATAMI forecasts of RM739.4m/RM840.7m/RM960.9m. Decline in forecasted FY23 core earnings (-8.3% YoY) is due to disposal of its four highways. We expect earnings to recover from this trough as recently secured projects (RM11.6bn and RM1.3bn of contract wins in FY22 and FY23) enters stronger recognition cycle coupled with recognition of record high RM6.2bn unbilled sales.

BUY, TP: RM4.15. We resume coverage on Gamuda with a BUY rating and TP of RM4.15. TP is derived based on 20% discount to SOP value of RM5.08. At current ex. dividend price, Gamuda trades at FY23/24/25 P/E multiple of 12.8x/11.3x/9.9x (- 0.5SD) and P/B multiple of 0.9x (-0.5SD) despite still being in a contract upcycle. Key catalysts include contract wins. Risks: project delays, execution in new markets, prolonged elevated materials prices, labour shortage and health of property market.

Source: Hong Leong Investment Bank Research - 14 Dec 2022