KEY INVESTMENT HIGHLIGHTS

• 4QFY20 normalised earnings rebounded strongly by +225.0%qoq to RM130.8m albeit fell by -27.0%yoy

• Cumulative FY20 earnings of RM519.8m (-25.8%yoy) was within our and consensus expectation

• Poised to be a major beneficiary of impending revival of mega shovel-ready public infra projects in Malaysia

• Major contracts worth over AUD10b to be potentially secured in Australia in FY21-22

• Solid outstanding order book of about RM7.0b which translates into earnings visibility for the next three years

• Upgrade to BUY with a revised target price at RM3.81

Resilient FY20 earnings performance. Gamuda Berhad’s 4QFY20 normalised earnings rebounded strongly by +225.0%qoq to RM130.8m, primarily driven by swift resumption of construction operations and the traffic volumes return to normalcy post-MCO (Table 1). Meanwhile, the group’s cumulative FY20 normalised earnings remained resilient which fell by only -25.8%yoy to RM519.8m despite the advent of MCO lockdowns for almost half of its financial year. This came in within our and consensus’s expectation, accounting for 98.2% and 101.2% of the full year estimates respectively. Note that the normalised earnings excluded one-off impairment of RM148.0m due to the closure of one of its two Industrialised Building System (IBS) factories.

Potentially strong order book replenishment to be driven by higher infra spending. We believe the impending revival of mega public infra projects (i.e. MRT3 and KL-SG HSR) during the upcoming Budget 2021 to pump prime the economy to benefit the group moving forward. With the expected completion of MRT2 by end-2022, we foresee that the MRT3 to be a low-hanging fruit project to be rolled-out in the near future. To recall, MMC-Gamuda was appointed as the MRT2’s project delivery partner in October 2014, about three years before the completion of MRT1 in July 2017. The revival of the JB-SG RTS could also be a strong precursor for the KL-SG HSR project to likely have a favourable outcome in which the group is a strong contender given its reputation in public projects and sound balance sheet.

...more contract wins could be coming from Australia. We gather that the contract award for “M6 Stage 1 Motorway project” worth about AUD2.6b in Sydney involving building a twin 4-km tunnels is expected to be announced in 1HFY21 in which the group is one of three bidders. We believe Gamuda has a higher likelihood of clinching the deal, premised on that it is the only contender with a local JV partner (BMD Constructions Pty Ltd) and its extensive experience in tunnelling projects such as the completed SMART tunnel project in Kuala Lumpur.

In addition, the group’s JV with a reputable construction company, Laing O’Rourke, has been shortlisted for the first stages of the AUD20b “Sydney Metro West Project”. We understand that the group’s JV is one of three bidders for the two tunnel packages under the project which could be awarded in FY21 or FY22. With the Australia government’s planned AUD100b infra spending over the next decade, we believe Gamuda’s overseas expansion efforts into Australia and revival of Malaysia’s mega infra developments would likely bode well to its order book and earnings momentum moving forward.

Property division is expected to recover in FY21. In FY20, Gamuda’s property sales fell -30%yoy to RM2.2b mainly due to lockdown and customers’ postponement of property sales amidst the Covid-19 outbreak. Nonetheless, the group has seen an improvement of +150.0%qoq to RM230m following the easing of lockdown in 4QFY20. The management has projected new property sales worth of RM3.5b in FY21, almost about the same level in FY18, primarily predicated on its overseas segment from Hanoi, Ho Chi Minh City and Singapore contributing two-third of its overall sales. Nonetheless, we believe the group’s property segment to stage a gradual rebound in FY21 with our conservative assumption of RM2.8b sales on improving consumers’ sentiments following the resumption of economic activities amidst the Covid-19 outbreak.

Earnings estimates. We are making some housekeeping changes to our earnings estimates to also take into account the impact of the ongoing COVID-19 pandemic and extended RMCO on the group’s businesses. We are revising our FY21 and FY22 earnings forecasts to RM592.6m and RM622.2m respectively.

Target price. We are revising our TP to RM3.81 (previously RM3.35) by pegging a PER of 15.2x to the group’s FY22 EPS of 25.1sen. Note that we are rolling over our valuation base year to FY22. Note that the target PER is +1.0SD premium above the group’s five-year historical average. We opine that the premium is justified given the group’s solid order book, encouraging prospects of job replenishment rate on overseas and domestic contracts for public infra projects, and a sound balance sheet.

Upgrade to BUY. In the near term, we expect that the group’s revenue and earnings prospects to post a relatively healthy recovery in FY21 earnings following the prompt resumption of construction and business activities and increased workforce capacity at work sites as seen during the Recovery MCO period. On a longer-term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM7.0b which will provide earnings visibility over the next three years. Notably, we are of the view that Gamuda to be one of the stronger beneficiaries from the impending revival of big-ticket infra projects such MRT3 and KL-SG HSR given its strong track record in MRT2 and other major public projects. Coupled with its focus for oversea expansion, we remain positive on the group’s job replenishment prospects to continue to be driven by its in-roads into Australia’s growing construction market. In addition, we posit that the group’s valuation has turned attractive as it is currently trading at about 13.1x which is -2SD discount to its 5-year historical mean. All factors considered, we upgrade our recommendation on GAMUDA to a BUY call from previously NEUTRAL.

Source: MIDF Research - 28 Sept 2020