Partnering With DNEX to Establish a 50:50 Joint Venture

GAMUDA has announced a strategic move to expand beyond its core construction and property businesses into the digital infrastructure sector. The company plans to establish a 50:50 joint venture (JV) with DNex Solutions Sdn Bhd, a wholly owned subsidiary of Dagang NeXchange Bhd (DNEX). This JV, with an initial paid-up capital of RM1mn, aims to deliver Google Distributed Cloud (GDC) air-gapped services to government and private sector clients requiring enhanced isolation and privacy configurations.

The scope of the JV includes procuring GDC hardware, developing customised Artificial Intelligence (AI) solutions, creating applications, providing ongoing client support, managing data migration, and maintaining infrastructure. Notably, this JV will be the sole provider for GDC services in Malaysia.

Under the partnership, GAMUDA will contribute its technical expertise in AI and cloud technologies, conduct financial assessments, secure financing, and develop business strategies for the JV. Additionally, GAMUDA will leverage its AI Academy to promote and accelerate AI adoption across Malaysia.

DNEX, on the other hand, will focus on managing stakeholder relationships and leveraging its existing business networks, technical expertise, customer base, and other relevant resources to ensure the success of the GDC services.

Acquiring a 20% Stake in Cloud Space

In a separate announcement, GAMUDA revealed plans to acquire a 20% equity stake in Cloud Space Sdn Bhd for up to RM18mn. The payment will be made in three phases, starting with up to RM9mn injected as capital through the subscription of new Redeemable Convertible Cumulative Preference Shares (RCCPS) and ordinary shares in Tranches 1 and 2, respectively. The remaining amount, capped at RM9mn, will be used to purchase existing shares, subject to Cloud Space meeting its financial milestones within the next three to five years.

As part of the agreement, GAMUDA will hold the first right of refusal to form equity partnerships with Cloud Space for future large-scale cloud projects in Malaysia, with a guaranteed minimum stake of 50%.

Established in 2022, Cloud Space is a Google Cloud Premier Partner offering services such as Google Cloud, Google Workspace, Chrome Enterprise, and Google for Education to public and private sector clients in Malaysia. The company is also recognised for its expertise in cloud computing, AI and data automation, and cybersecurity solutions.

The acquisition valuation, estimated at RM75mn to RM90mn, is based on Cloud Space’s projected financial performance, growth potential in the cloud computing sector, and comparisons with similar companies in both local and global markets.

Our Views

The company is optimistic about its expansion into AI and air-gapped cloud storage, bolstered by a promising outlook in Malaysia. This confidence is reinforced by Google’s committed investment of USD2bn to establish a data centre in the country. Additionally, the demand for digital infrastructure is expected to gain further momentum with the rollout of the Malaysia Artificial Intelligence Roadmap (MAIR) and the upcoming launch of the National AI Office (NAIO) in December 2024.

While GAMUDA is confident that this venture could evolve into its third revenue pillar by addressing the rising demand for AI-driven digital infrastructure, we believe that its impact on group earnings may initially be minimal due to its early stage. Nevertheless, the GAMUDA-DNEX JV and Cloud Space are well-positioned to capitalise on increasing project inflows, supported by strategic allocations outlined in Budget 2025. These include RM10mn for the National AI Office and RM50mn for AI education, aimed at fostering AI adoption and developing a skilled workforce. These initiatives could significantly contribute to future earnings growth.

Although the announcement did not disclose details of Cloud Space’s historical financials, we estimate its annualised FY24 earnings could range between RM3.0mn and RM3.6mn, based on the valuation range of RM75mn to RM90mn. This is derived from a projected average FY24 trailing PE of 25x, benchmarked against comparable industry peers.

Impacts

No changes to our earnings estimates, pending more updates from an analyst briefing to be held on 12th December 2024.

Valuation

We maintain our SOP-derived target price of RM10.98, inclusive of a 3% ESG premium based on our 4-star rating. Maintain Buy call on the stock.

Source: TA Research - 11 Dec 2024