Gamuda reported 1QFY23 core PATAMI of RM190.4m coming slightly above our and consensus expectations. We expect a stronger 2HFY23 from ramp up of RM13.9bn contracts secured in CY22 and recognition of RM5.8bn of unbilled sales. Award decision in Australia could come in 1HCY23 as the company continues to tender for projects amidst the infra boom down under. Our base case for MRT3 is a 3-6 months cost review. Maintain forecasts. Maintain BUY rating and TP of RM4.15. Post going ex. special div, valuation looks attractive at FY23/24/25 P/E multiple of 12.8x/11.2x/9.8x (-0.5SD) and P/B multiple of 0.8x (- 2SD) despite still being in a contract upcycle. Key catalyst includes contract wins. Risks: project delays, execution in new markets, prolonged elevated materials prices, labour shortage and health of property market.

Slight beat. Gamuda reported 1QFY23 results with revenue of RM1.4bn (-30.4% QoQ, +81.3% YoY) and core PATAMI of RM190.4m (-25.4% QoQ, +24.9% YoY). The results was slightly above our and consensus expectations at 26% of full year forecasts. Though results were 26% of forecasts, we deem this to be above expectations as we anticipate a stronger 2HFY23 as ramp up of new projects and recognition of unbilled sales could accelerate earnings into the back-end of FY23. Contrary to our and consensus expectations of a decline in FY23 earnings, management is targeting a flattish year, roughly 8% higher than our forecasts. We have adjusted 1QFY23 core PATAMI for the RM978.3m gain on highway disposal (adjusted for MI share).

Dividends. DPS of 6.0 sen was declared with ex. date to be determined later (1QFY22: 6.0 sen).

QoQ. Core PATAMI decreased by -25.4% due to slower contribution from its construction and property segments. Construction burn is weaker with MRT2 tapering off as it nears full completion while new construction projects are still ramping up. Likewise property recognition was also weaker but should increase sequentially. QoQ comparison for property was also depressed by lumpy earnings recognition from VN in 4QFY22.

YoY. Core PATAMI came in +24.9% higher, in large part due to restrictions impacting various business segments in 1QFY22. Recall that domestically, 1QFY22 would have reflected peak lockdown domestically while Vietnam went into lockdown in July-Sept 21, depressing Gamuda’s property recognition for the quarter.

Construction. Gamuda’s orderbook stands at RM14.8bn as of end Oct-22 with 78% coming from overseas projects. Contract wins in CY22 has so far totalled RM13.9bn. The company is now shortlisted for two packages (mutually exclusive) of the SRL East tunnels in AU which spans 26km in total. Award decision for the first package is likely in 1HCY23, failing which Gamuda will automatically qualify to tender for the second package where award decision is expected in 2HCY23. Going forward, we expect more project shortlisting amidst the infrastructure boom down under. Management’s goal is to eventually execute projects as the sole contractor. Domestically, management awaits key decisions on MRT3 (CMC303: RM10-15bn at 100%) and PSI (RM6-7bn). Our base case for the MRT3 is a cost review which could typically take 3-6 months, possibly delaying awards to mid-2023. As for the PSI, if on track, EIA approval could come in Jan-23.

Property. Unbilled sales stayed high at RM5.8bn. Sales in 1QFY23 came in at RM480m, trailing management’s FY23 target of RM4.5bn (HLIBf: RM4.0bn). 60% of sales came from Malaysia with key projects Gamuda Cove, Gamuda Gardens, twentyfive.7, Jade Hills and Horizon Hills making up most of domestic sales. Slower overseas sales were due to popular projects being mostly taken up. Despite the weak sales figure this quarter, management has maintained their RM4.5bn sales target expecting local projects and quick turnaround projects (QTP) overseas to gain further traction into the year. Roughly 2/3rd of the RM1.5bn QTP sales target 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. All in all, we reduce FY23 property sales assumptions to RM3.5bn.

RE. The RE vertical will become the focus in rebuilding recurring income base. Gamuda recently invested RM200m in return for a 30% stake in ERS Energy, mainly a solar EPCC player (orderbook: RM1.4bn). 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.

Forecasts. Despite our expectations of a stronger 2H, we keep forecasts unchanged to stay conservative.

Maintain BUY, TP: RM4.15. Maintain BUY rating and TP of RM4.15 derived based on 20% discount to SOP value of RM5.09. Post going ex. special div, valuation looks attractive at FY23/24/25 P/E multiple of 12.8x/11.2x/9.8x (-0.5SD) and P/B multiple of 0.8x (-2SD) despite still being in a contract upcycle. Key catalyst includes 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 - 19 Dec 2022