• Stay NEUTRAL, new SOP-based TP of MYR4.11 from MYR3.73, 1% upside with c.3% FY24F (Jul) yield. Gamuda’s wholly owned foreign sub- subsidiary in Australia, DT Infrastructure (DTI), is acquiring the Australian transport project businesses (referred to as Downer Transport Projects (DTP)) from Downer. DTP is a distinct business unit under Downer providing civil construction services in transport-related projects. Gamuda is trading at 13.3x FY24F P/E, which is +1SD from the KLCON index – which rationalises our NEUTRAL rating on the counter.

• Transaction details. We gather that Downer group has a strong focus in the management and maintenance of transport, utilities and asset services. However, the group began exiting the higher-risk construction market and other non-core businesses (such as mine-blasting and open-cut mining) in FY20, under its Urban Services Strategy – securing c.AUD778m from the sale of such businesses. As such, we regard the transaction value of MYR636m as reasonable, given Gamuda’s forte in construction – with a 4x EV/EBITDA vs the 5-7x EV/EBITDA for similar transactions in the past three years in Australia.

• Impact on Gamuda. DTI has AUD3.3bn worth of projects in hand – mainly small to mid-sized projects of <AUD800m that have shorter turnaround periods compared to Gamuda Engineering Australia’s (GEA) Sydney Metro West project of about 5 years. More importantly, GEA could easily form JVs with DTI instead of others (Figure 1), to bid for infrastructure projects totalling up to c.AUD8.3bn (non-exhaustive). Via DTI, Gamuda can expand its reach to other states in Australia, ie Western Australia (43% of DTI’s FY23F revenue) which has some of the worlds’ largest iron ore deposits – implying the demand for rail infrastructure to move such commodities.

• Potential earnings accretion. DTI’s impact on Gamuda may occur after the transaction is concluded in end-FY23, with AUD2bn worth of total works in hand being accretive to Gamuda. Premised on better chances of securing jobs via DTI, we lift our job replenishment assumption of MYR10bn each in FY24-25F to MYR15bn. As such, our FY24-25F earnings are now higher by 13-14%, while FY23F earnings are left unchanged. The net effect of earnings revisions and adjustment for the transaction consideration (towards net cash level) in our SOP valuation bumps up our TP to MYR4.11, with a 2% ESG premium, based on our in-house proprietary methodology.

• Concerns. Despite the aforementioned prospects of the acquisition, we prefer to exercise prudence on its property segment (40% of FY22 profit). With most of its quick-turnaround projects under its property segment being skewed towards Vietnam in terms of GDV, we are aware of home buyers in Vietnam facing tightening credit risks increases, as the State Bank of Vietnam has cautioned against risky property loans. Factors to upgrade our call include the approval for the Penang South Island project, combined with a faster-than-expected rollout of Mass Rapid Transit 3 contracts.

• An upside risk to our call includes acceleration in contract awards. The converse of this would represent a downside risk.

Source: RHB Research - 23 Feb 2023