GAMUDA is making a surprise move, by venturing into the cloud and AI space through: (i) a JV partnership with DNEX to be the sole provider of Google Distributed Cloud (GDC) Services in Malaysia; and, (ii) acquiring a 20% equity stake in a Google Cloud Premier Partner. That said, cloud expertise is not new to GAMUDA who has already been using cloud in-house, and having its own AI Academy. For the opportunity set, the investment risk is low due to the relatively small outlay. We maintain forecasts, TP of RM10.80 and OUTPERFORM, pending details during the upcoming results briefing.

Venture into the cloud space. Yesterday, GAMUDA announced two moves by its wholly-owned Gamuda Technologies Sdn Bhd i.e. (i) partnering with DNEX (Not Rated) for a 50:50 JV to be the sole provider for Google Distributed Cloud air-gapped services (GDC Services) to government and clients in Malaysia; (ii) taking up a 20% equity stake in Cloud Space Sdn Bhd (Cloud Space) for up to RM18m investment (RM9m cash, and remainder up to RM9m over 3–5 years (subject to meeting financial targets). Cloud Space, a Google Cloud premier partner, offers services for Google Cloud, Google Workspace, Chrome Enterprise, and Google for Education, to government and private sectors in Malaysia.

Rationale. We understand that the former transaction under JV is a more focused on targeting organisations that have local-country storage or compliance requirements, and keeping information on the premise with low latency and sovereignty in mind under GDC services, while the latter transaction under Cloud Space is meant to capture all other enterprise opportunities. Under Cloud Space, Gamuda has 20% only but has first rights to form any equity partnership for any new large-scale project (pending briefing for definition), with a minimum 50% stake.

This is not something new as GAMUDA has an in-house cloud team during the construction of the MRT1 where it leveraged cloud solutions to enhance work efficiency. While no earnings guidance was provided, the JV is targeting we understand a cRM6b market for the GDC Services in the country while Cloud Space aims to capture a share of a cRM30b cloud and AI market that Gamuda sees.

In our view, the investment risk in these ventures is minimal due to the small capital outlay, with the potential for significant returns. If successful, this could establish cloud and AI as GAMUDA's third core business after construction and property development. With this expansion, GAMUDA's scope now extends from constructing data centres to providing cloud and AI services. We expect further details during the result briefing tomorrow.

Forecasts. Maintained.

Valuations. Our SoP-based TP of RM10.80 is maintained, valuing its construction business at 22x FY26F PER and includes a 5% premium given its 4-star ESG rating as appraised by us (see Page 6).

Investment case. We like GAMUDA for: (i) being in the driver's seat for the Mutiara Line of the Penang LRT, (ii) its ability to secure new jobs in overseas markets, (iii) its strong war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM31.4b (excluding Penang LRT and this pumped hydro project), and (v) its inroads into the renewable energy space. Maintain OUTPERFORM.

Risks to our call include: (i) delays in the roll-out of key public infrastructure projects in Malaysia such as the MRT3, (ii) rising input costs and labour shortage, (iii) risks associated with operations in overseas markets such as change in government policies towards foreign businesses and forex, and (iv) liquidated ascertained damages (LAD) from cost overrun and delays.

Source: Kenanga Research - 11 Dec 2024