• Keep BUY, with new SOP-based MYR6.46 TP from MYR5.66, 28% upside and c.2% FY24F (Jul) yield. We visited Gamuda’s industrial building system (IBS) plant located in Banting and came away feeling upbeat on the prospects the group has for its IBS products. We view its IBS capabilities may position the group to capture data centre opportunities within the Klang Valley with Tenaga Nasional’s (TNB MK, BUY, TP: MYR11.80) Green Lane Pathway, facilitating a smoother and faster setup of data centres in the country.

• GAM has two IBS plants – one located in Banting (capex: c.MYR400m) and the other in Sepang (capex: c.MYR100m) with a total maximum combined production capacity of c.10,000 residential units per year. Efficiency wise, GAM’s IBS capabilities enable the reduction in construction period by c.50% and c. 20% for high rise and landed buildings.

• Data centre job exposure. According to the Construction Industry Development Board (CIDB), AIMS Data Centre awarded Gamuda with a MYR170m job to construct a data centre in Cyberjaya in Feb 2023 with a completion target by end CY23. While no exact details were mentioned by CIDB, we believe that the data centre could be the 8MW AIMS Cyberjaya Block 2 data centre whereby Gamuda utilised its “Next-Gen Digital Industrialised Building System (IBS)” solutions. Profitability wise, such projects could fetch PBT margin ranging between 10-12%, in our view.

• Given that IBS jobs mostly revolve around GAM’s residential jobs plus the data centre – we estimate pre-cast orderbook to be c.MYR300m as of end FY23. Although IBS job orders are modest (at only 1.5% of the orderbook at end-FY23), we learnt that Gamuda is currently eyeing some data centre jobs within the Klang Valley. In the event data centre jobs become more sizeable, we believe the group can fully utilise both factories to accommodate these orders.

• No changes to our earnings estimates but we take the opportunity to raise our target P/E to 15x (from 14x) for the Malaysia construction arm in light of potential prospects from data centres. We are also lowering our discount to RNAV to 50% (from 60%) for GAM’s property segment considering the Johor Bahru-Singapore Rapid Transit System Link and the potential JB Light Rail Transit that may provide good visibility for Horizon Hills (GDV: MYR2.2bn) in Iskandar Puteri amid improvement in cross border traffic.

• As a result, we derive a new TP of MYR6.46 (from MYR5.66) which bakes in a 6% ESG premium based on a revised ESG score of 3.3 (from 3.2) as GAM’s IBS plants use green cement and are equipped with the concrete recycling system (<1% construction wastage). We take the view that GAM’s current 12.6x FY25F P/E is undemanding as it was trading around 16x P/E in mid- CY17 during the construction upcycle when its orderbook was only at MYR7.8bn vs c.MYR27bn now. A rerating catalyst is faster-than-expected job wins in Australia.

• A key risk includes slower-than-expected job replenishment trends.

Source: RHB Research - 13 Feb 2024