• Upgrade to BUY from Neutral, with a new MYR4.95 TP from MYR4.35, 20% upside and c.3% FY24F (Jul) yield. We view Gamuda as a strategic hedge towards downside risks from the local construction sector given its sizeable overseas footprint (c.88% of outstanding orderbook) – warranting our call upgrade. Excluding the MSCI Index rebalancing exercise on 31 May, the percentage of Gamuda shares traded daily under the KL Construction Index remained rather low (<20%) since the February spike, implying opportunities to accumulate in light of better prospects overseas.

• Overseas jobs progressing well. We learnt that its overseas jobs, particularly the Sydney Metro West project is progressing well with roadheaders carving out tunnels based on a media report in late May. The outcome for the bids of the Suburban Rail Loop (SRL) East tunnelling works is expected to be known towards end-CY23. In addition to the normal infrastructure projects, the group is also eyeing renewable energy (RE) projects such as hydropumps in Tasmania.

• Casting a wider net in Malaysia. Aside from its bid for the CMC03 tunnelling package for the Mass Rapid Transit 3 (MRT3), Gamuda has also been pre-qualified for the systems package (estimated at MYR6.3bn). Its exposure in the Second Trunk Road and Pan Borneo Highway (PBH) Sarawak would enable the group to have a higher chance of securing packages from the remaining phases of the PBH, be it in Sarawak or Sabah. Therefore, we think that our FY24-25 job replenishment target of MYR13bn and MYR10bn is reasonable at this juncture.

• The scaling down of the Penang South Islands (PSI) has no impact on Gamuda as existing agreements with the Penang State Government (PSG) only relate to Island A. The Federal Government’s plan to fund the Bayan Lepas Light Rail Transit (BLLRT) may also reduce the funding risk for Gamuda, as the BLLRT was supposed to be financed by the proceeds of land sales from the reclaimed Islands.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

• Valuation. No changes to our estimates. Nevertheless, we have now segregated the construction segment into the Malaysia and overseas divisions in our SOP valuation. We also adjust our property segment’s discount to RNAV to 60% from 65%, premised on the ability of the Vietnam property market continuing to attract foreign investors despite headwinds faced by local developers. More than 90% of the total overseas GDV comes from projects in Vietnam. As a result, we arrive at a new SOP-derived TP of MYR4.95, which includes a 2% ESG premium on the intrinsic value based on an ESG score of 3.1.

• Key risks include slower-than-expected orderbook replenishment, undesirable cost review of projects, and a slowdown in the property market.

Source: RHB Research - 9 Jun 2023