• Reiterate BUY, new TP of MYR5.41 from MYR5.31, 16% upside with c.3% FY24F (Jul) yield. We were invited by Gamuda to visit the site of the Sydney Metro West-Western Tunnelling Package (SMW-WTP) project and attend a briefing with the management of Gamuda Australia and DT Infrastructure (DTI). We were pleasantly surprised by the progress made at the SMW-WTP project, and the business prospects Australia holds for the group. Overall, we still like Gamuda for its diverse geographical base, as well as its increasing focus towards the renewable energy (RE) space.

• Key takeaways. We came away from the SMW-WTP site visit feeling upbeat, especially with the latest Infrastructure review by the Government not impacting the project. With a 37% completion rate as at end-FY23, we estimate the SMW-WTP project to contribute 13% and 10% of overall earnings in FY24 and FY25. Future opportunities under the Sydney Metro project include four additional lines, combined with line wide jobs that may be eyed via DTI. Further updates are highlighted from page 4 onwards.

• Progress of tunnelling works. Two tunnel boring machines (TBMs) will be deployed for the SMW-WTP with the first TBM (TBM Betty) commencing works in Aug 2023 – this has reached a length of c.200 metres to date. The second TBM, TBM Dorothy, will kick off tunnelling works in late November/early December. The two TBMs are expected to arrive at Sydney Olympic Park and complete the first leg of their journey in mid-2024. They are expected to be retrieved, reassembled, and relaunched from the Rosehill TBM launch site in 3QCY24, where they will start tunnelling towards Westmead (Figure 1).

• Strategy in Australia moving forward. Gamuda will continue to keep an eye out for rail and road projects in Australia by leveraging on DTI's capabilities, backed by an estimated tenderbook of c.AUD5-6bn. Australia projects currently account for c.42% of the group’s orderbook, based on our estimates. With more emphasis by the Australia Government towards RE such as pumped hydro, solar and wind power, Gamuda Engineering Australia (GEA) is eyeing opportunities in the Tarraleah Power Station in Tasmania. Other prospects include engaging directly with RE asset developers via the partnership with ERS Energy by offering an equity plus EPC deal – which may provide a recurring income base plus construction orderbook replenishment.

• We make no changes to our estimates but take the opportunity to revise our ESG score to 3.2 (from 3.1) amidst the group’s focus towards RE projects in Australia. As such, we derive a new SOP-derived TP of MYR5.41 (previously MYR5.31), which bakes in a 4% ESG premium to its intrinsic value. GAM’s market valuation of 13.1x FY24F P/E is unjustified, as it was trading at a 16x P/E in mid-CY17 during the construction upcycle when its orderbook was only at MYR7.8bn, compared to c.MYR26bn now. Our BUY call is premised on its diverse geographical base for its construction and property arm, with c.50% of profit coming from overseas.

• A key risk includes slower-than-expected orderbook replenishment.

Source: RHB Research - 20 Nov 2023