• Keep NEUTRAL with unchanged TP of MYR3.55, 1% downside, and c.3% FY22F (Jul) yield. According to a media release published by Australia’s Minister for Infrastructure, Transport, Regional Development, and Local Government, the Australian and New South Wales Governments announced on 19 Jun 2022 that the Ferrovial Gamuda JV will design and construct the new Coffs Harbour Bypass. Major construction is expected to begin in early 2023 and end by late 2027.

• Impact to Gamuda. The contract value for the Ferrovial Gamuda JV (50:50) is c.AUD1.4bn, which means Gamuda’s share amounts to c.AUD0.7bn (MYR2.1bn). As a result, the latest contract secured in Australia brings the YTD new job wins in FY22 to c.MYR9.6bn. The project involves the upgrade of around 14km of the Pacific Highway at Coffs Harbour, starting from south of Englands Road roundabout to the dual carriageway highway at Sapphire, bypasses Coffs Harbour City from South of Englands Road intersection to Korora Hill, and tunnels through ridges at Roberts Hill, Shephards Lane, and Gatelys Road (refer Figure 1). The upgrade will deliver four lanes of divided motorway bypassing the Coffs Harbour central business district (CBD), saving motorists time by avoiding up to 12 sets of traffic lights. Management guided a high-single digit pre-tax margins which we opine could be in the range of 7-8%.

• Minimal execution risks. Gamuda’s JV partner for this contract, Ferrovial is a Tier 1 Spanish contractor with a track record of Australian projects under its belt. The projects include the Western Roads Upgrade in Victoria (AUD1.8bn), the Toowoomba Second Range Crossing in Queensland (AUD1.6bn), and the Pacific Highway Upgrade, from Warrell Creek to Nambucca Heads in New South Wales (AUD550m). As such, we opine that the execution risk for the Coff’s Harbour Bypass project is minimal.

• Other upcoming Australian projects in the pipeline. Recent newsflow indicate that Gamuda with its partners John Holland and Jacobs were shortlisted to qualify to bid for Melbourne’s North East Link project – Northern section. Tenders are expected in 3QCY22 with the outcome to be known in 1QCY23.

• Earnings estimates. We make no changes to our earnings estimates as the new job win is within Gamuda’s replenishment target for FY22F of MYR10bn. Our SOP-derived TP of MYR3.55 is maintained after ascribing a 2% ESG premium based on our in-house methodology. The stock is also currently trading +0.5SD from its 5-year historical mean and +1SD above the KLCON index’s 5-year historical average, hence our NEUTRAL call. Rerating catalysts for the stock include new wins from overseas jobs and possible rollout of the Bayan Lepas Light Rapid Transit (LRT) project.

• Upside/downside risks to our call include acceleration/delays in job replenishment and successful/unsuccessful bid in overseas projects.

Source: RHB Research - 20 Jun 2022