• Keep BUY and MYR5.31 TP (SOP), 16% upside, c.3% FY24F (Jul) yield. Gamuda, with Sabah Energy Corp (SECB) and Kerjaya Kagum Hitech JV (KKHJV), have formed JV company UPP Holdings to undertake a private finance initiative to develop the 187.5MW Upper Padas Hydroelectric Power Plant in Tenom, Sabah, worth MYR4bn. Gamuda will have a 45% share in the JV, with 40% and 15% held by SECB and KKHJV. The project developer will be Upper Padas Power, a wholly owned subsidiary of UPP Holdings.

• Further details. The hydropower plant is estimated to have a construction period of five years and an initial operating period of 40 years. UPP Holdings (see Figure 1) as the project developer shall appoint a consortium between Gamuda and KKHJV as turnkey contractor. We gathered that Gamuda will take the bulk of construction work, and as such, could recognise MYR2.5- 2.8bn worth of orderbook value from the project – assuming a 70:30 share (of the MYR4bn construction cost) in the consortium as turnkey contractor. Therefore, Gamuda’s unbilled orderbook could rise to c.MYR27bn as a result of this project. Construction works are expected to commence in 1HCY24, and to be completed in five years.

• Operational structure. As part of the JV, a power purchase agreement (PPA) is to be finalised and entered into between the project developer and the offtaker, Sabah Electricity. Existing hydroelectric power plants in Sabah, such as Jentayu Sustainables’ (JSB MK, NR) 40MW Telekosang Hydro project has a tariff of MYR0.24kWh. Therefore, we estimate the tariff for the Upper Padas Hydroelectric Plant to be c.MYR0.30kWh or more, based on its larger capacity of 187.5MW.

• Hydropower prospects in Sabah. About 90% of Sabah’s energy supply is fossil-fuel based, with rural electrification levels being the lowest at 88.7%, compared to West Malaysia and Sarawak (above 90%). Sabah also currently only has a less than 12% reserve margin of electricity supply (well below the ideal 30% margin). With increasing demand from the industrial sector for green energy, there is a need to further increase electricity generation to ensure a stable base load.

• No changes to our earnings estimates pending the finalisation of tariff details and PPA developments. As such, our SOP-derived TP (includes a 2% ESG premium) of MYR5.31 is unchanged. We view that GAM’s current 12.9x FY24 P/E is unjustified, as it was trading at 14x P/E in mid-CY17 during the construction upcycle, when its orderbook was only at MYR7.8bn compared to >MYR20bn now. Our BUY call is premised on GAM’s diverse geographical base for its construction and property arm, with c.50% of profit coming from overseas. A further rerating catalyst would be Gamuda’s potential to win the c.MYR4-6bn Mass Rapid Transit 3 (MRT3) system package after being pre-qualified for the job.

• Key risks include slower-than-expected job replenishment trends.

Source: RHB Securities Research - 31 Oct 2023