Moving from earnings to valuation re-rating:

■ We believe valuation re-rating is imminent as margin trajectory improves and the faster-than-expected target of RM25bn new wins by CY24F is achieved.

■ Potential FBM KLCI constituent at current market capitalisation.

 ■ Reiterate Add with a higher TP of RM9.50.

https://rfs.cgsi.com/api/download?file=2be8ec22-9de6-4315-a6b6-9148eb5348f7&rpt=CCC9188F-F3A3-F666-3EF9-91889B8DF89E

Valuation re-rating imminent; reiterate Add with higher TP:

 The re-rating seen over the past year has been driven more by EPS upgrades (Fig 1). As investors warm up to better earnings delivery, outperformance in new order wins and improving margin trajectory, we think a valuation re-rating is imminent. Valuations remain attractive, at 15x CY25F P/E on a 3-year EPS CAGR of 16% (FY23-26F) which is still below 1 s.d. above mean since 2005’s 22x. We reiterate Add and raise our SOP-derived TP to RM9.50 which factors in a higher P/E of 22x (vs. 18x) for construction (1 s.d. above mean since 2005), updating the recent Quick Turnaround Projects and net debt figures. At our revised TP of RM9.50, the stock will trade at 20x CY25F P/E, still below 1 s.d. above mean since 2005. We think this is justified given its record diversified orderbook, increasing data centre exposure and rising construction margins as local projects start to contribute. Key downside risks: potential labour shortage issues and higher raw material costs. Key re-rating catalysts: more construction wins and stronger property sales.

Ambitious targets to double revenue but focus on new term wins:

Gamuda’s longer-term group revenue projection for the next five years (FY24F-FY28F) is to hit RM30bn in FY28F (from RM15bn in FY24F). Dissecting the construction revenue, this would imply cumulative new order wins of c.RM47bn until FY27F to hit RM20bn revenue in FY28F (Fig 3). For now, we think investors will focus more on the nearer term new wins where it is confident of achieving its target of RM25bn new orders and RM30bn orderbook by year end (RM24bn as at Apr 24) with YTD wins of RM9bn. The more assured wins are domestic, which will be positive for margin recovery where we are projecting construction pretax margins of 7.7-7.8% for FY25F/FY26F vs 5.7% in 9MFY24. We expect local projects to contribute 30% of construction revenue in FY25F (vs 15% in FY24F). Potential local wins include Penang LRT (Gamuda’s share: c.RM4bn) and the BOT Upper Padas hydroelectric power plant and water treatment plant in Sabah (c.RM7bn-8bn). It is confident of clinching another data centre win by end-24 adding to its RM2bn orderbook from data centres. The outcome of the Suburban Rail Loop (SRL) East second package in Victoria is expected soon where Gamuda and its partner are one of two parties shortlisted.

Potential KLCI constituent and higher dividends:

Gamuda’s current market cap of RM20bn makes it the 24th largest and a potential FBM KLCI constituent. The next review will be in Dec 24 and it is already under the FBM KLCI Reserve List. Gamuda has lifted its annual DPS to 16 sen and expects this is to trend up to 20 sen when it achieves a higher revenue base and potential cash recovery from its older Vietnam property projects.