GAMUDA is acquiring a 30% stake in ERS Energy Sdn Bhd (ERS), a seasoned player in the Malaysian solar scene for RM200m cash. We are positive over the acquisition which would boost its presence in the renewable energy sector. The valuation of 11-12x forward PER is attractive as compared with the trading forward PER of 15-25x for similar listed companies. As earning enhancement from the acquisition is <1%, we maintain our forecasts, TP of RM5.15 and OUTPERFORM call.

Acquiring ERS Energy Sdn Bhd. GAMUDA is acquiring a 30%- associate stake in ERS, a solar engineering, procurement construction and commissioning (EPCC) player for RM200m, valuing it at RM667m (or pre-money equity of RM467m). ERS is one of the first movers in Malaysia’s solar scene and is now one of the largest EPCC player in Malaysia with over 700MW worth of completed solar projects ranging from residential, commercial and large-scale projects.

Note, ERS is GAMUDA’s existing JV partner (51:49 basis) in developing a 39MW solar power plant in Pekan under the NEDA (New Enhanced Despatch Agreement) framework by TENAGA. Thus, Gamuda’s effective stake within this power plant under construction would increase to 64% post the acquisition of ERS.

GAMUDA guided for the deal valuing ERS’s pre-money equity at RM467m and 11-12x in terms of forward PER, implying FY23F earnings of RM39m-RM42m. This is at a discount to the trading forward PER of 15-25x for listed solar EPCC peers such as SLVEST and SAMAIDEN.

Expediting its Green Plan sustainability approach. The acquisition of ERS would enable GAMUDA to expedite its progress within the renewable energy business through further investment in solar generation assets, and new opportunities such as energy storage and smart grids. Additionally, ERS’s business direction is also in line with GAMUDA’s commitment to reduce carbon emission by 30% in 2025 and 45% by 2030. Thus, we are mildly positive over the acquisition.

Forecasts. Post acquisition, Gamuda’s net gearing would rise marginally to 0.01x from a current net cash position. Meanwhile, as additional contributions from ERS account for <1% of our FY23-24F earnings, we maintain our forecasts.

Maintain OP with unchanged SoP-TP of RM5.15 based on 18x PER for its construction segment. We continue to like GAMUDA given: (i) the good chances of it garnering a significant slice of action in MRT3, (ii) its contract wins in Australia, Singapore and Taiwan that speak eloquently for its competitiveness in the international market, (iii) strong balance sheet position post disposal of tolls and (iv) its strong earnings visibility underpinned by record high outstanding orderbook of RM15.3b. we accord a 5% premium to its TP given a 4-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) governments cutting back on public infrastructure spending on austerity drive, (ii) delays in the rollout of key public infrastructure projects in Malaysia such as MRT3, (iii) delays in the PSI project due to funding/environmental issues.

Source: Kenanga Research - 8 Dec 2022