Gamuda announced that it has entered into an agreement to buy DTP from Downer EDI for cash consideration of RM636m to be completed in mid-CY23. We are positive on the acquisition due to: (i) strategic reasons highlighted below, (ii) decent acquisition price and (iii) orderbook expansion. Going forward we see this as cementing Gamuda’s position to ride on the robust infrastructure construction market in Australia. We expect further contract catalysts in mid CY23. Increase FY24 and FY25 earnings forecasts by 9.5% and 7.1%. Maintain BUY with a higher TP of RM4.88. Key catalysts include contract wins. Risks: project delays, execution in new markets, prolonged elevated materials prices, labour shortage and health of property market.

NEWSBREAK

Gamuda announced that it has executed an asset sale agreement to acquire Australian transport projects business (Downer Transport Projects or DTP) from Downer EDI (ASX listed) and VEC Civil Engineering Pty Ltd for an enterprise value sum of AUD212m (RM636m) to be satisfied by cash. The acquired business will be housed under Gamuda’s wholly owned foreign subsidiary, DT Infrastructure Pty Ltd (DTI). The transaction is now subject to approval from Foreign Investment Review Board of Australia (FIRB) and is slated for completion by the end of 2QCY23. We understand that the FIRB approval is customary in nature and unlikely to be a roadblock.

HLIB’S VIEW

Strategic acquisition. Gamuda’s acquisition is strategic in nature as it extends the company’s reach into Western Australia (WA) from its current established base in the states of New South Wales and Victoria. DTI is experienced in the area of track infrastructure, systems, maintenance as well as road and bridge construction. Projects involved are mainly small & medium sized projects (<AUD800m) complementing well with Gamuda’s focus on large scale infrastructure projects (>AUD800m). Going forward, Gamuda envisions forming JVs between Gamuda Australia and DTI, in-line with its goal of garnering a larger slice of the robust Australian infrastructure market. DTI employs around 1.1k employees spread across the various states of Australia with the largest workforce centred in WA (37%). Ultimately, with this, Gamuda aims to achieve sustainable AUD3bn revenue in 3 years.

Financials. DTI’s acquisition price of AUD212m (RM636m) translates to an EV/EBITDA multiple of 4.0x (based on average FY22/23 EBITDA), a discount to the historical trading EV/EBITDA multiple of 5-7x for construction businesses in Australia. P/E wise, the transaction comes in at a decent historical P/E multiple of 7.5x. Management foresees sustainable EBITDA contribution of AUD53m (RM161m) from DTI with room for further upside going forward. EBIT margin guidance hovers around 8-10% for this business. Post-acquisition, Gamuda’s net gearing will rise from 0.1x to 0.2x which leaves ample capacity to fund PSI project should it materialise.

Orderbook expansion. At present, DTI carries an unbilled construction orderbook of AUD3.3bn and is expected to inject approximately AUD2.0bn (RM6.1bn) upon completion in mid-CY23. This would bring Gamuda’s consolidated orderbook closer to RM22bn (+38%). Looking ahead, the upcoming SRL East package (AUD5.5bn) awards could take place in mid-CY23, while we expect MRT3 jobs could be awarded after.

Forecasts. We lift our FY24 and FY25 earnings forecasts by 9.5% and 7.1% after incorporating the above acquisition. No changes to FY23 forecasts.

Maintain BUY, TP: RM4.88. Maintain BUY with a higher TP of RM4.88 (from RM4.15) derived based on 10% discount (from 20%) discount to SOP value of RM5.38. We ascribe a lower SOP discount in view of its sustained contract upcycle, a rarity within the Malaysian construction space. Our TP implies a justifiable FY23f/24f/25f P/E multiple of 17.3x/13.9x/12.4x. 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 - 23 Feb 2023