We view the sell-down on GAMUDA shares yesterday - triggered by the news on the potential cancellation of the Metro West project in Australia - as a good buying opportunity. We believe GAMUDA’s tunnelling package for the project has passed the point of no return at 40% completion. We maintain our forecasts, TP of RM5.15 and OUTPERFORM rating.

Investor sold down GAMUDA (as much as 7.5% before settling down at 4.4% at the market close) with a heavy volume 37.4m shares traded following news reports that the New South Wales (NSW) premier may consider cancelling or reviewing the scope of the Metro West train line after the project cost shot up from AUD16b to AUD25b owing to rising material costs as well as expansion in its scope of works.

To recap, in March 2022, GAMUDA secured tunnelling and civil works of the Sydney Metro West-Western Tunnelling package via the Gamuda Australia-Laing O’Rourke Australia consortium from the Transport of NSW for AUD2.16b with a targeted completion by 2026. We learned that GAMUDA had completed 40% work progress with one tunnel boring machine (TMB) already deployed while the second TMB will start work in two months’ time.

We concur with the company that it is highly unlikely that GAMUDA’s tunnelling package will be affected as it is almost half-way through at 40%. It is also unlikely to cut the cost of the tunnelling packages and it is costly to scrap the project at this stage. At worst, should the package be terminated, it would reduce GAMUDA’s FY24 net profit by 8%. Assuming the remaining 60% works to be c.RM3.9b with an operating margin of 11%, total profit contribution would be RM300m over the next three years. We believe the RM429m loss in the market cap yesterday is unwarranted.

Forecasts. Maintained.

We continue to like GAMUDA for: (i) it being the front-runner for the tunnelling job for the MRT3, (ii) its job wins in Australia and Singapore that speak eloquently for its competitiveness in the international market, (iii) its strong balance sheet after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a robust outstanding order book of RM21.5b, and (v) its efforts to expedite growth in the renewable energy space in line with global sustainability goals.

We maintain our TP of RM5.15 which includes a 5% premium accorded to its TP given a 4-star ESG rating as appraised by us (see Page 5). Maintain OUTPERFORM.

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

Source: Kenanga Research - 1 Aug 2023