• Stay BUY, new MYR9.68 TP (SOP) from MYR7.69), 24% upside, 2% FY24F (Jul) yield. We reaffirm our view that Gamuda remains undervalued – it is trading at 18x FY25F P/E, which is not far from the 16x seen during the 2017 upcycle when the outstanding orderbook was just c.MYR7.4bn vs c.MYR24bn now. Our expectation of job wins of at least MYR10bn pa backs our 3-year earnings CAGR (2023 to 2026) of 16%.

• Assuming an orderbook burn rate of MYR5bn between July and December, with a balance orderbook of between MYR22bn and MYR24bn as of June, GAM needs MYR11-13bn in new wins to reach its MYR30bn target orderbook by end CY24. Potential job wins we can expect within the next six months include: Penang Light Rail Transit Segment 1 (c.MYR4.8bn for GAM’s 60% share in SRS Consortium), the Upper Padas Hydroelectric Dam (c.MYR2-3bn) and water supply scheme for it (at least MYR4bn), and high capacity signalling project for DT Infrastructure (worth at least AUD500m).

• Additionally, GAM may potentially clinch another data centre (DC) job in FY25, as its industrialised building systems or IBS factories can accommodate 2-3 DC jobs with a total capacity of c.200MW at one go. A bonus for GAM would be if it were to clinch highway projects in Sarawak and Sabah, ie new phases of the Pan Borneo Highway and Northern Coastal Highway.

• GAM’s foreign shareholding still has room to go higher, backed by robust local and overseas infrastructure pipelines – at 25% in May. During the CY17 construction upcycle, GAM’s foreign shareholding hovered between 25% and 35% while the peak in the last 11 years was seen in May 2013 at 48%.

• We raise our FY25F-26F earnings by 8% each as we anticipate gradual margins improvements for its construction arm on higher volume of incoming domestic jobs with better margins. We tweak our property sales recognition trends too amidst better prospects, particularly for GAM’s local township projects, ie Gamuda Gardens (Rawang in Gombak District) and Gamuda Cove (Kuala Langat District) – both districts have seen growth in residential property transactions to the tune of 11% and 45% YoY in 1QCY24.

• On the valuation front, we are ascribing a higher target P/E of 25x (from 18.5x) and 20x (from 17x) for GAM’s domestic and overseas construction arms. The target P/E for the local construction wing is justified, as DCs and hydropower projects were absent during the c.16x peak reached during the CY17 construction upcycle. Meanwhile, the revised target P/E for overseas construction is warranted amidst a more stable construction price index in Australia, which facilitates margins improvement (Figure 3).

• As a result, we derive a new TP of MYR9.68, which bakes in an 8% ESG premium based on a revised ESG score of 3.4 (from 3.3). This is due to GAM’s efforts to be part of other green projects such as renewable energy zones – via a partnership with Rohas Tecnic (RTEC MK, NR) – and wind farms. Key risks include slower-than-expected job replenishment trends.

Source: RHB Research - 16 Jul 2024