• Keep NEUTRAL and SOP-based MYR3.55 TP, 5% upside, c.4% yield. Gamuda’s 1HFY22 (Jul) core earnings were at 55% of our and Street’s full- year estimates – within expectations. In terms of growth, core net profit expanded 41% YoY in 1HFY22, supported by higher earnings in the construction and property development segment. Share price upside appears limited, as most of the positives stemming from overseas contracts (particularly Australia) and the Mass Rapid Transit 3 (MRT3) project have been priced in at this juncture.

• Overall earnings grew in 2QFY22, driven by higher revenue of MYR1.3bn (+72% QoQ, +44% YoY) for the quarter. At the group level, the construction division contributed 45% of 2QFY22 revenue – a 2.8% growth – while PBT expanded 64% YoY. As such, the segment’s PBT margin reached 17.4% in 2QFY22 (2QFY21: 11%) as projects such as the MRT2 are nearing the tail end, therefore restoring unutilised provisions to the bottomline.

• Vietnam’s property development arm yet to fully recover. The group’s property development arm saw robust PBT growth, at a faster pace of 164% YoY in 2QFY22, and expanded >100% YoY in 1HFY22. Expansion was mainly from pre-sales of domestic properties such as Gamuda Cove and twentyfive.7, which both expanded >200% YoY in 1HFY22. On the flip side, Vietnam saw a 57% YoY and 29% YoY decline in pre-sales for Celadon City and Gamuda City, dragging overall overseas pre-sales by 3% YoY in 1HFY22. This is as Vietnam is seeing slow recovery after COVID-19 restrictions were eased on 1 Oct 2021.

• Near-term prospects. Management has guided for more unrecognised contingencies from MRT2 to be included in its earnings. Nevertheless, we think this will be partly offset by start-up costs incurred for its latest projects such as the Defu station project in Singapore, and the Sydney Metro West tunnelling project. While Gamuda aims to win at least one new project annually from each overseas market (Taiwan, Singapore and Australia), we believe competition in the global stage remains intense, especially with ongoing inflationary concerns.

• As YTD earnings were in line, we make no changes to our FY22-24F earnings. We keep our SOP-derived MYR3.55 TP, which is based on 11x P/E multiple to construction earnings (about -1SD below the KLCON 5-year mean), and includes a 2% ESG premium on our computed intrinsic value. We believe most of the positives have been priced in, and uncertainties on the status of the Penang South Reclamation or PSR project remain.

• Upside/downside risks: Fast pick-up/prolonged slowdown in the property market, and faster/longer-than-expected contract awards.

Source: RHB Research - 24 Mar 2022