• Maintain NEUTRAL and SOP-based MYR3.83 TP, 3% downside. Gamuda, with its Taiwan-based JV partner, Asia World Engineering & Construction Co. (AWEC) was awarded a contract for the construction of the TaoYuan City Underground Railway Project Package CJ18 PingZhen Commuter Station in Taiwan. The contract awarder was the Taiwan Ministry of Transportation and Communications’ Railway Bureau. The total contract value is c.MYR2.1bn with an estimated completion timeframe of 96 months from Jan or Feb 2023.

• Further details. The project covers the construction of a 3.7km underground twin bound railway track, promoting efficient use of the land in the Ping Zhen district. Gamuda’s 60% stake in the JV leads to an attributable contract value of c.MYR1.3bn. This is the first win for FY23F (Jul), bringing the number of projects in Taiwan to five with a total outstanding orderbook of c.MYR2.3bn. The company was previously involved in the Kaohsiung Metropolitan Mass Rapid Transit between 2002 and 2008. Overall, its latest construction orderbook now stands at c. MYR15bn. Profitability wise, we gathered that PBT margin for the project is in the range of 8-10% – similar to its other overseas projects in Australia but generally lower than its Malaysian-based projects.

• Views. AWEC has been involved in railway projects such as the Kaohsiung City Underground Railway project and the ZhongYuan Road Bridge. Therefore, risk of underperformance is somewhat manageable given AWEC’s experience in the said projects. However, we remain cognisant of Taiwan’s construction industry which has faced severe labour shortage leading to a delay of major infrastructure projects according to an article published by the Taipei Times in October.

• Outlook. Potential new jobs aside from the Mass Rapid Transit 3 (MRT 3) project (expected award: likely in 1Q23 from 4Q22) include the North-East Link highway project and the Suburban Rail Loop project in Melbourne. Tenders are expected to be out in 4QCY22 with the outcome to be known in 1HCY23. However, we flag execution risks as Gamuda is rather relatively new in Australia.

• Earnings estimates and valuation. We make no changes to our estimates as the latest job win of MYR1.3bn is within our FY23F replenishment assumption of MYR13.5bn, which is at the middle of management guidance of MYR12-15bn. As such, our SOP-derived TP of MYR3.83 is unchanged after ascribing a 2% ESG premium based on our in-house methodology. Looking ahead, we are of the view that progress of the approval of the Environmental Impact Assessment (EIA) report for the Penang South Islands (which could give an immediate orderbook of MYR5bn), may be on the back burner in light of the current political landscape. Valuation also appears lofty as Gamuda’s FY24F P/E is trading at +2SD from its 5-year historical mean P/E, hence our NEUTRAL call.

• Risks. Upside risk includes faster-than-expected job replenishments. The converse represents the downside risk.

Source: RHB Research - 28 Oct 2022