KEY INVESTMENT HIGHLIGHTS

• 1QFY21 normalised earnings fell -30.3%yoy to RM109.4m which came in within our expectation

• This mainly attributable to the lower domestic property earnings on slower progress billings (-40.0%yoy)

• Poised to be a major beneficiary of impending roll-out 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 RM6.1b which translates into earnings visibility for the next three years

• Maintain BUY with a revised target price at RM4.20

Within expectation. Gamuda Berhad’s 1QFY21 normalised earnings declined by -30.3%yoy to RM109.4m, primarily attributable to the sharp fall in property earnings by -80.0%yoy to RM9.9m. Nonetheless, the group’s earnings came in within our expectation, accounting for 18.5% of the full year estimates respectively as we are expecting stronger earnings recovery in coming quarters premised on higher progress billings at its construction and property sales. Meanwhile, the performance of the construction division remains a bright spot, being the least affected as construction activities are deemed as essential services.

Potentially fast-tracked mega public infra projects could drive order book replenishment prospects. We believe the approval and impending roll-out of mega public infra projects (i.e. MRT3 and KL-SG HSR) as announced in 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 earliest in the 2HCY21. 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. Therefore, we are of the view that the group’s FY21 earnings to be a back-loaded year.

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 1HCY21 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 1HCY22. 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 sales target on track. In 1QFY21, Gamuda’s property sales increased by +32.2%yoy to RM673.0m, of which two-thirds are mainly driven by overseas projects contributed by Gamuda City in Honoi and Celadon City in Ho Chin Minh. Nonetheless, a -40.0%yo lower progress billings caused by construction disruptions has resulted in lower PBT (Table 1). As a result, the division’s 1QFY21 PBT margin contracted to 4.2% from 12.1% previously. 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.

Earnings estimates. We are revising our FY21 and FY22 earnings forecasts to RM603.0m and RM651.8m respectively. This is mainly premised on our expectancy of a potential roll-out of KVMRT3 and HSR mega infra projects in late CY21 given that the government aims to pump-prime the economy next year and possibly fast-track the implementation process. A faster-than-expected discovery of vaccine is anticipated to further aid an economic recovery and quicker resumption of business activities leading to the earnings recovery across all segments.

Target price. We are revising our TP to RM4.2 (previously RM3.81) by pegging a higher PER of 16.0x (previously 15.2x) to the group’s FY22 EPS of 26.3sen. Note that the target PER is about the group’s two-year historical high. 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.

Maintain BUY. We continue to expect that the group’s revenue and earnings prospects to post a relatively stronger recovery in coming quarters following the prompt resumption of construction and business activities and increased workforce capacity at work sites as seen during the CMCO period. The group’s construction division remains a bright spot as evidenced from the resiliency of the its 1QFY21 PBT margin at 7.2% vs 7.4% in prior corresponding period. On a longer-term horizon, the group’s prospect is well-supported by its strong outstanding order book of about RM6.1b 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 roll-out and 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. Given the stronger expectancy of potential positive news flow into FY21 on the broad construction sector and brighter order book replenishment prospects, we are ascribing a two-year historical high of PER to the group which is warranted at current juncture, in our view. All factors considered, we are maintaining our BUY recommendation on GAMUDA.

Source: MIDF Research - 22 Dec 2020