• We expect Gamuda to report better core earnings qoq but lower yoy in its upcoming 4QFY20 results to be announced on 25 September 2020.
• Earnings are expected to see a slow recovery after 2 years of contraction on expectations of a pick-up in new contract awards in FY21E.
• Prospects to replenish its order book are improving on expectations of rising infrastructure spending in Malaysia and Australia. We upgrade our call to BUY with a higher RNAV-based target price (TP) of RM3.98.

Core Earnings Recovery Underway

After reporting a 14-year low quarterly core earnings of RM40m in 3QFY20, we expect a qoq rebound in 4QFY20. The government’s Movement Control Order (MCO) led to the halting of construction works at most above-ground sections of the Klang Valley MRT Line 2 (MRT2) and its local property development sites in March-May 2020. Traffic volumes for its toll highways were down 80-90% during the period. We gather that both construction works and traffic volumes on its toll highways are back to 90% of pre-MCO levels in 4QFY20. On the back of this, we expect core earnings to rebound to RM128m (+221% qoq, -36% yoy) in 4QFY20.

Working on Securing New Contracts

Gamuda and BMD Constructions Pty Ltd have jointly submitted the tender for the M6 Stage 1 Motorway project in the south of Sydney, Australia. The project is estimated to cost A$2.6bn and is scheduled to be completed in late-2025. We understand that the contract is expected to be awarded in November-December 2020 and the Gamuda-BMD Joint Venture (JV) is among the three shortlisted bidders. Assuming Gamuda’s share of works is 70% of the project cost and a PBT margin of 5%, winning the project will contribute PBT of RM273m in FY21-26E. We lift our core earnings by 2-9% in FY21-22E (7% in core EPS for FY22E) to reflect new contract win assumptions of RM0.65bn/RM3.9bn/ RM10.5bn in FY20/21/22E respectively.

Potential Beneficiary of Revival of Infrastructure Projects

The RM21bn MRT3 project could be revived and included in the Budget 2021 announcement on 6 November 2020. We believe the MMC Gamuda JV will be in a strong position to bid for the project as an incumbent undertaking the MRT2 project currently. We lift our RNAV-based TP for Gamuda to RM3.98 on a higher construction division valuation based on a sustainable PER of 20x, close to 1- standard deviation above the 10-year mean. We upgrade our call to BUY from Hold.

Core Earnings Rebound Expected in 4QFY20

We expect Gamuda’s core earnings to see a strong qoq rebound in 4QFY20 albeit from a low base in 3QFY20. Gamuda posted a 14-year low core earnings of RM40m in 3QFY20 due to the adverse impact of the MCO on all its operations except the MRT2 tunnelling works that were not affected. We expect the fast recovery in traffic volume for its toll highways and the ramp-up of construction works for its MRT2 and property development projects to drive a strong 221% qoq earnings rebound to RM128m in 4QFY20, although that would still be 36% yoy lower than the RM199m achieved in 4QFY19.

Sydney Project Award Expected Soon

TheEdge reported that Gamuda-BMD JV, Acciona-Samsung JV and CPB-Ghella JV were invited to tender for the M6 Stage 1 Motorway project. The outcome of the tender is expected in November/December 2020. The map and details for the project is available on these sites: https://v2.communityanalytics.com.au/rms/f6 and https://www.rms.nsw.gov.au/projects/f6/index.html. The highway project includes the building of twin 4-km tunnels; Gamuda has past experience in road tunnel projects from building The Stormwater Management And Road Tunnel (SMART) in Kuala Lumpur.

Local Partner Advantage

We understand that Gamuda’s JV is the only one with a local partner, which will provide the local expertise in its bid. Winning the project will allow Gamuda to penetrate the Australian infrastructure construction market, which is expanding due to the government’s plan to ramp up infrastructure spending by A$100bn over the next decade with a focus on road and rail projects. Although competition for the project is expected to be stiff against the other 2 multinational contractor JVs, we believe that Gamuda’s JV has a good chance of winning the project, which we estimate will contribute 1.8-4.7% of PBT in FY21-23E.

Uncertainties Persist on PTMP Project

The Gamuda-led SRS Consortium is working towards meeting the requirements for the reclamation of Island A under the Penang South Reclamation (PSR) component of the PTMP. SRS will provide RM1.3bn of financing to the Penang state government and the latter will raise another RM1.2bn to kick start the project. Under the Master Agreement signed on 1 July 2020, SRS will earn a Project Delivery Partner (PDP) fee of 5.00-5.75%. Gamuda is also allowed to bid for the reclamation works as a contractor and we gather that it is close to securing a partner/subcontractor with experience in this area.

Reduce DCF Valuation for PTMP

There could be delays in kicking off the project due to Covid-19 and controversy surrounding the project. We reduce the DCF valuation for the PTMP project by 6% to RM428m in our RNAV estimate. This is to reflect the lower PDP fee assumption of 5.75% (revised down from 6% previously) and a delay in the implementation of the project to 2HFY22 from 1HFY22 assumed previously. We assume the PTMP project will contribute 2.8-5.1% of PBT in FY22-23E.

Slow Recovery in Earnings

We expect core EPS to contract 28% yoy in FY20E due to the adverse impact of the MCO and Covid-19 pandemic on Gamuda’s core operations. However, we lift core net profit by 2-9% in FY21-22E (+7% for core EPS in FY22E) after incorporating new contract wins of RM0.65bn in FY20E (Taipei Port Seawall project secured in January 2020) and RM3.9bn in FY21E (potentially contributed by the Australian contract bids).

We assume the MMC Gamuda JV will win the RM21bn MRT3 project in FY22E and contribute to new contract wins of RM10.5bn (50% share of works). The positive impact of the new contract wins on core EPS would be partly offset by the dilution impact of new shares issued. Based on these assumptions, we expect core EPS growth of 2.2%/4.0%/9.9% in FY21/22/23E respectively. But core earnings in FY21- 23E are expected to remain below the recent high of RM720m in FY19.

Upgrade Call to BUY From Hold

We raise our 12-month RNAV-based TP to RM3.98 from RM3.75 previously to reflect higher valuations for its construction (raise PER to 20x from 16x previously), property development (higher RNAV) and property investments (higher book value as at 30 April 2020) segments. This is partly offset by a lower DCF valuation for its PTMP project and dilution from new shares issued under Gamuda’s Dividend Reinvestment Plan (19.8m new shares issued on 25 February 2020) and Employees’ Share Option Scheme (ESOS).

We believe the target FY21E PER of 18.9x is reasonable, still below the 1-standard deviation above the 10-year mean of 19.7x. Gamuda has traded at high PERs in the past on the back of news flow of new contract wins. We believe prospects for Gamuda to win new contracts are improving with the tenders submitted for Australian projects and the potential revival of mega projects in Malaysia, such as the MRT3 and Kuala Lumpur-Singapore High Speed Rail (HSR). Gamuda’s CY21E PER of 16.4x is attractive relative to the construction sector weighted-average CY21E PER of 19.5x, on our estimates. Given the potential upside of 12.7% to our new TP and reasonable FY21E net yield of 3.4%, we upgrade our call on Gamuda to BUY from Hold.

Source: Affin Hwang Research - 17 Sept 2020