GAMUDA tallied unexciting 1QFY25 earnings, and will count on an acceleration of jobs locally in the coming quarters with FY25 setting up to be a strong prospect year for this latest addition to the KLCI. It has outlined three new growth drivers over next three years, i.e., data centre where it expanded on a differentiated approach and RE projects for its construction segment, its cloud and AI new venture, and not forgetting its property QTP++ plan.

We maintain our earnings and OUTPERFORM call with TP of RM10.80 (ex-bonus TP: RM5.40).

1QFY25 results in line. At 15%/17% of house/street's FY25 estimates, we still deem GAMUDA's 1QFY25 net profit of RM205.4m within expectations as stronger earnings in the coming quarters may be helped by potential variation orders finalisation in its Sydney Metro West project. It declared a first interim NDPS of 10.0 sen (or ex-bonus share of 5.0 sen) in 1QFY25 as against 6.0 sen paid in 1QFY24. Its 1- for-1 bonus shares will be listed and quoted on 23 Dec. This will also be the same day that GAMUDA's inclusion into the FBM KLCI takes effect.

A modest result. YoY, revenue grew substantially by 47% on higher overseas projects billings by Gamuda Engineering (GE), especially from Australia, although 1QFY25 net profit expanded a smaller 5% to RM205.4m on lower margins in Australia. Still, GE earnings were higher while Gamuda Land (GL) in contrast reported lower earnings (-13%) which can be attributed to the completion of Vietnam's Celadon City at the end of last year.

QoQ, 1QFY25 net profit fell 25% to RM205.4m from RM272.5m while top line contracted by 22%, as earnings declined for GE, (-22%) and GL, (-31%) on normal quarterly fluctuation in billings.

The key takeaways from the results briefing are as follows:

1. GAMUDA expects three new growth drivers over the next three years: (i) Energy Transition (ET) through data centres and renewables; (ii) Information Technology (IT) as a new digital pillar i.e., cloud digital and AI from its new ventures; and, (iii) Property on quick turnaround projects (QTP), especially the Vietnamese market.
2. GE unveiled a "bundled land + water + power" as a differentiated approach for its data centre clients. The assertion that these data centres can be built in a common facility, cost effective with better profit margin (than the MRT) is likely a reflection of a targeted approach for its customer. The fact that Gamuda is also in talks to build water treatment plants (80 milion-litres daily) for this purpose is interpreted by us that indeed its data centre pipeline should be robust and its cost likely to be able to be passed through. Of note, its expanded digital IBS facilities can undertake eight jobs concurrently.
3. Meanwhile, GE sees good potential for RE jobs in Australia with a two-year pipeline of AUD25b, with several jobs already in early contractor involvement (ECI) phase.
4. The latest expansion of Gamuda Technologies (GT) via JV with DNEX (Not Rated) and equity participation with Cloud Space has launched GAMUDA into the digital infrastructure space. Leveraging on its own AI Academy with 200 IT professionals, this new segment will become the third core business of GAMUDA. The JV is targeting a RM6b market for the GDC Services while Cloud Space, which is not confined to Malaysia opportunities, aims to capture a share of a RM30b cloud and AI market. We have not accorded benefit to this space for now. Property sales surged 39% in 1QFY25 to RM633m. GL expects QTP earnings to grow at a 30% CAGR till FY27. Its Vietnam QTP sales have been strong, with Eaton Park Phase 2 selling out in one weekend (total sales of USD210m or equivalent to RM931m), Meadow Phase 1 sold out in three months, and Elysian hitting a 90% take-up rate. It has secured a deal in the 3rd largest Vietnamese city, Haiphong, and expects more deals in the following quarters.
5. Current GE's outstanding order book is RM30b, falling in line with its end-CY24 target of RM30b−RM35b while end-CY25 target remains at RM40b−RM45b. It expects stronger job wins in the immediate term, including the Penang LRT, Sabah water treatment plant and several RE projects in Australia.

Forecasts. Maintained, based on assumption of new job wins of RM14.5b and RM17.0b for FY25 and FY26 respectively.

Valuations. We maintain our SoP-based TP of RM10.80 (see Page 4), or ex-bonus TP of RM5.40 that values its construction business at 22x FY26F PER and includes a 5% premium given a 4-star ESG rating as appraised by us (see Pages 6). This is despite our FY25 earnings revision as our valuation is based on FY26 numbers.

Investment case. We continue to like GAMUDA for: (i) being in the driver's seat for the Mutiara Line for the Penang LRT, (ii) its ability to secure new jobs in overseas markets, (iii) its solid war chest after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a record outstanding order book of RM30.0b, and (v) its inroads into the renewable energy space. Maintain OUTPERFORM.

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

Source: Kenanga Research - 13 Dec 2024