• Maintain NEUTRAL and MYR3.55 TP, 5% upside with a c.4% FY22F (Jul) yield. We believe most of the positives regarding Mass Rapid Transit 3 (MRT3) have been priced in. Gamuda may also need time to fill in the 20- 25% earnings vacuum caused by the toll highway disposal. It is also trading near its 5-year historical mean P/E – albeit at +1SD from the KLCON index’s 5-year historical average P/E – which justifies our call. Re-rating catalysts: Winning new overseas jobs and possible rollout of the Bayan Lepas Light Rapid Transit project.

• Penang South Reclamation (PSR) project update. In March, the Penang State Government (PSG) resubmitted the environmental impact assessment report for the development of three artificial islands under the PSR project to the Department of Environment (DoE) in March. The DoE’s decision is expected to be known by August. Initial reclamation works for Phase 1 Island A of the PSR project could fetch an orderbook value of c.MYR5bn (c.10% PBT margin) attributable to Gamuda Engineering. More importantly, the project developer JV formed between the Gamuda-led SRS Consortium and PSG to undertake the development of Island A including land sales could fetch an estimated GPM of c.18% over six years. The latest news indicates that the PSR’s latest social impact assessment study has recorded a close to 80% approval rate from more than 700 survey respondents living near the proposed project.

• Delay risks may still linger despite recent positivity. Current initiatives carried out under the Social Impact Management Plan by the PSG include, amongst others, training fishermen to obtain their certificates of competency from the Marine Department to work as seafarers. While the PSR project has garnered some positivity, execution risks still linger even if it is approved – especially with the 15th general election likely being held as early as 2H22. As such, land reclamation works for Phase 1 Island A could face a delay beyond 2H22.

• What to expect. The tentative date for the release of Gamuda’s 3QFY22 earnings is 29 Jun. It recorded a net profit of MYR177m (+44% YoY) for 2QFY22. We believe Gamuda should continue to record earnings growth of >5% YoY in 3QFY22, as more provisions could be written back and recognised in the bottomline. The majority of the provision write-backs may come from the Mass Rapid Transit 2, which is nearing completion (at 92% as of February). This should also partly mitigate the impact from elevated raw material prices for the quarter ended Apr 2022. We maintain FY22F- 24F earnings at this juncture and our SOP-derived MYR3.55 TP. Our TP has a 2% ESG premium built in, based on our in-house methodology. Upside/downside risks to our call include acceleration/delays in job replenishment and successful/unsuccessful bids on overseas projects.

Source: RHB Research - 16 Jun 2022