Investment Highlights

• We maintain BUY recommendation on Gamuda with an unchanged SOP-based fair value (FV) of RM6.73/share. Our FV reflects a 3% premium for its 4-star ESG rating and implies a FY24F P/E of 15x, near the group’s 5-year average.

• We fine-tuned our forecasts as Gamuda’s 1QFY24 core net profit (CNP) of RM195mil was within expectations, representing 17%-19% of our full-year forecast and street’s vs. 18% in 1QFY23. The group declared an interim dividend of 6 sen, half of our FY24F DPS as expected.

• YoY, Gamuda’s 1QFY24 CNP rose 35% as revenue doubled to RM2.8bil, driven by substantively higher recognition of overseas construction billings, which also bore lower margins and largely caused a 2%-point decline in group EBITDA margin to 8.7%.

• Sequentially, 1QFY24 CNP dropped by 23% as revenue declined 18%, largely from lumpy billings in the property development as well as construction progress in the previous quarter.

• Besides the healthy results announcement, Gamuda also secured a SGD510mil (RM1.8bil) contract to design and build the Mass Rapid Transport’s (MRT) West Coast underground station and 2 tunnels (1.9km in total length) for the Land Transport Authority of Singapore. The work, which involves 2 slurry tunnel boring machines, will commence in 1Q2024 with completion by 2032.

• This represents the third project which the group clinched over 3 consecutive months after management revealed a target to win RM25bil projects over 2 years during the 4QFY23 analyst briefing in September.

• The previous contracts include the RM3bil Kaoshiung MRT project (which augurs well for more in future) and a 45:55 JV with Sabah Energy Corporation and Kerjaya Kagum Hitech to develop a RM4bil Upper Padas hydroelectric dam project with a capacity of 187.5MW in Sabah.

• Including this fresh Singaporean contract, the novation of Downer Transports projects worth RM4.6bil and RM1.2bil variation orders for Sydney Metro West’s Western Tunneling package, Gamuda’s outstanding construction order book rose 25% QoQ from RM20.6bil in July 2023 to RM25.8bil, representing 2.9x FY24F construction revenue.

• With the substantive Singapore MRT job, Australia now accounts for 47% of Gamuda’s outstanding construction orderbook vs. 58% in July, while Malaysia’s portion fell to 22% from 27% previously.

• The group remains confident of securing an additional RM22bil pipeline of projects with discussions at an advanced stage to finalise the Federal government-funded Penang LRT project while Sydney Metro West contract appears poised for additional variation orders with New South Wales’ premier Chris Minns announcing 2 more stations, including at Rosehill where Gamuda Sydney is undertaking tunnelling works currently.

• For the property development division, 1QFY24 overseas revenue declined 24% YoY as Celadon City in Vietnam nears the end of its development cycle, partly offset by a domestic revenue growth of 12% YoY. Nevertheless, the segment’s pretax profit rose 46% YoY from a 7%-point improvement in margins. Looking forward, Gamuda expects to double FY24F property development revenue and add 2 more quick turnaround projects next year to its current portfolio of 8.

• Gamuda currently trades at an attractive CY24F P/E of 10x, which is significantly below its 5-year average of 14x.

• Challenges include (i) eroding margins from higher-than-expected construction costs and labour shortages; and (ii) shelving of mega projects.

Source: AmInvest Research - 7 Dec 2023