• Keep BUY and MYR11.67 TP (24% upside), c.2% FY25F (Jul) yield. Gamuda has entered into a 50:50 JV with Dagang NeXchange (DNEX MK, NR) to provide air-gapped Google Distributed Cloud (GDC) services to the Government and private clients in Malaysia. GAM also announced that it is acquiring a 20% stake (for MYR18m) in Cloud Space, a Google Cloud Premier (GCP) partner, which provides solutions and services for Google Cloud, Google Workspace, Chrome Enterprise, and Google for Education to the Malaysian Government and the private sector.

• The JV. The JV will act as a sole provider of GDC services, which is a fully managed cloud experience for organisations that require complete isolation to meet stringent sovereignty and regulatory requirements. The JV will also be the first local provider of air-gapped GDC services covering the procurement of GDC hardware, providing customised Artificial Intelligence (AI) solutions, applications development, ongoing client support, data migration, and infrastructure maintenance for clients.

• The investment in Cloud Space. Based on a valuation range of between MYR75m and MYR90m for Cloud Space and Alphabet Inc’s (GOOGL US, NR) trading P/E of c.23x, Cloud Space’s earnings may range between MYR3.3m and MYR3.9m (or between MYR0.7m and MYR0.8m based on GAM’s 20% share). While earnings accretion from the investment in Cloud Space is minimal, we envisage that better yielding opportunities could arise from the condition that GAM has the first right of refusal to form equity partnerships with Cloud Space for any new large-scale cloud projects, with GAM having a minimum 50% stake. More importantly, there is a potential MYR36bn market size for GAM to tap into via cloud and AI capabilities.

• We think GAM’s move to enhance its AI capabilities may lead to the creation of a new business segment for digital infrastructure. Such a plan would bode well with the Government’s MYR10m allocation for the National Artificial Intelligence Office under Budget 2025, which is tasked to drive AI adoption. The icing on the cake would be if GAM is selected to participate in other upcoming digital infrastructure projects by Google, such as data centres.

• No changes to our earnings estimates, pending further clarity from management’s briefing tomorrow. GAM’s digitalisation venture may require time before it can materially contribute to its bottomline. Our SOP-derived TP of MYR11.67(which bakes in an 8% ESG premium) is unchanged.

• Key risks include cost overruns and sluggish contract awards.

Source: RHB Securities Research - 11 Dec 2024