• Keep BUY and SOP-based MYR6.30 TP, 20% upside and c.2% FY24F (Jul) yield. The Cabinet on 29 Mar announced that the Penang Light Rail Transit (LRT) Mutiara Line was approved on 22 Mar. Under this project, MRT Corp will be the project developer and asset owner. The Penang LRT will have a stretch of c.29km with 20 stations including two interchange stations at Komtar and Penang Sentral – estimated to take six years to be completed ie by 2030.

• Contracts for the Penang LRT comprises three segments – i) Silicon Island to Komtar (Segment 1), ii) Komtar to Penang Sentral (Segment 2) and iii) turnkey systems and rolling stocks (Segment 3). Gamuda via its subsidiary, SRS Consortium (SRS) has been offered the contract for Segment 1 based on the Single Sourcing Request For Proposal (SSRFP) mechanism following a request by the Penang Government, which appointed SRS as the project delivery partner (PDP) of the Penang Transportation Master Plan (PTMP) which includes the Penang LRT through an open tender in Aug 2015.

• Impact to Gamuda. Details of the contract value of Segment 1 would be finalised subject to negotiations between SRS and MRT Corp within a period of up to six months before works can begin in 3QCY24 or 4QCY24. We view that the total construction cost for Segment 1 would be in the range of MYR8-10bn with a PBT margin of 5-8%. While there was no mention of the Komtar to Tanjung Bungah line under the approved Penang LRT alignment, Penang Chief Minister Chow Kon Yeow expressed hope that it will be considered in the future phase of the project.

• Further thoughts. The SSRFP mechanism likely implies a turnkey contractor role (higher accountability-bearing cost overruns and financing) for SRS in our view vs a PDP role (paid with fees to ensure a project is delivered on time and within the budget). Nonetheless, GAM is very well experienced in handling large ticket projects and therefore, we see no major concern in managing project margins should Segment 1 be under a turnkey basis.

• Additional opportunities still up for grabs. The contracts for Segment 2 and 3 of Penang LRT will be done via open tenders which SRS would still be able to submit bids. Therefore, this may allow the possibility of further orderbook expansion from GAM’s MYR24bn total outstanding orderbook as of end-Jan.

• No changes to our earnings estimates as our assumptions for the contract size of Segment 1 (MYR8-10bn) would still be within our MYR25bn job replenishment target over FY24F and FY25F. As such, our SOP-derived TP of MYR6.30 remains, after baking in a 6% ESG premium. Our BUY call is premised on its current valuation, trading at 13.9x FY25F P/E which we view as unjustified – GAM was trading at a 16x P/E in mid-CY17 during the construction upcycle when its orderbook was only at MYR7.8bn compared to MYR24bn now.

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

Source: RHB Research - 1 Apr 2024