The 40-year concession of Upper Padas Hydropower has been confirmed, which adds RM0.24/share to GAMUDA’s 45% equity stake. Next, the signing of PPA and the award of EPCC contract are set to conclude soon to meet the timeline of getting the plant ready by end-2030. In addition, there is potential water plant package in the future with potential of setting up a floating solar farm. While maintaining forecasts, TP is raised by 3% to RM7.54 and upgrade to MARKET PERFORM.

Upper Padas Hydropower concession confirmed. Last Friday, GAMUDA confirmed that Upper Padas Power Sdn Bhd (UPPSB), a wholly-owned subsidiary of its 45%-owned UPP Holdings Sdn Bhd (JVCo) has accepted a Letter of Notification (LoN) from the Energy Commission of Sabah (ECoS) for the development of the 187.5MW Ulu Padas Hydroelectric Project in Tenom, Sabah. To recap, the JVCo was formed on 30 Oct 2023 by GAMUDA, Sabah Energy Corporation Sdn Bhd (a Sabah state government-linked company) and Kerjaya Kagum Hitech JV Sdn Bhd (a power plant construction company) with the equity ratio of 45:40:15, to develop the said 187.5MW hydropower plant on a PFI basis at c.RM4b.

Signing of PPA and award of EPCC contract next. The project, which involves the building of a dam, is expected to start construction in 2025 after UPPSB signs a 40-year PPA with the off-taker Sabah Electricity. The hydropower plant is expected to be completed in six years with the Scheduled Commercial Operation Date (SCOD) to be on or before 31 Dec 2030. As such, the signing of PPA and the award of EPCC contract are likely to be in the pipeline soon to meet the deadline. In addition, as a condition of the LoN, UPPSB is to propose and implement a floating solar solution integrated with the project, and to achieve SCOD before 31 Dec 2031.

A multiple-income-source project. We are positive on this project as it provides GAMUDA with 40 years of recurring concession incomes coupled with EPCC construction earnings. In addition, there is a potential water plant package as well as potential earnings from the above-mentioned floating solar earnings from end-2031. We have assumed RM400m annual revenue from this RM4b PFI project over 40 years with WACC of 7%, this gives GAMUDA’s SoP of RM0.24 for its 45% equity stake. For the construction EPCC portion which we assumed RM3b, to comply with at least 40% local participation requirement to Sabah-based subcontractors, we expect GAMUDA to secure RM1.8b EPCC contract that generates EBIT of RM36m a year based on 10% EBIT margin.

Forecasts. Maintained because the impact of the concession will only be accounted for beyond our forecast stage, while the construction component is still within our job win assumptions.

Valuations. We upgrade our SoP-based TP by 3% to RM7.54 (see Page 2) from RM7.29, to include the concession share from Upper Padas valuation (RM0.24). Our TP also values its construction business at 20x FY25F PER and includes a 5% premium given its 4-star ESG rating as appraised by us (see Pages 6).

Investment case. We like GAMUDA for: (i) being in the driver’s seat for the Mutiara Line of the Penang LRT and front-runner for the tunnelling job for the MRT3, (ii) its ability to secure new jobs in overseas markets, (iii) its strong war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM26.5b (excluding Upper Padas Hydro and Penang LRT), and (v) its inroads into the renewable energy space. We upgrade our call to MARKET PERFORM from UNDERPERFORM following the recent price weakness

Risks to our call include: (i) delays in the roll-out of key public infrastructure projects in Malaysia such as the MRT3, (ii) rising input costs and labour shortage, (iii) risks associated with operations in overseas markets such as change in government policies towards foreign businesses and forex, and (iv) liquidated ascertained damages (LAD) from cost overrun and delays.

Source: Kenanga Research - 9 Sep 2024