• Maintain BUY with SOP-based MYR6.30 TP, 19% upside, 2% FY24F yield. The Government of Western Australia has selected AD Alliance – comprising Alstom Transport Australia and Gamuda’s wholly-owned subsidiary DT Infrastructure (DTI) – as the preferred proponent to design, supply, build, and maintain the Public Transport Authority’s High Capacity Signalling (HCS) project on rail networks. Announcement of the preferred proponent paves the way for contract negotiations to commence. We estimate the overall contract size to be well in excess of AUD1bn.

• The HCS project involves upgrading of the existing fixed block system (nearing the end of its useful life) to a moving block system (under HCS) (Figure 2). The fixed block system uses coloured signals at the start of each of its section – with a number of blocks between trains for safe operations, leading to more space between trains and fewer trains on the track at any time. Meanwhile, the moving block system enforces speed limits of trains to maintain a closer but safe distance between trains – enabling more trains to run more often.

• Potential orderbook impact. DTI is no stranger to projects related to signalling, communications, and system integration as it secured an AUD6m job for signalling and communications services for V/Line Corporation. As of 31 Jan, DTI’s projects make up MYR4.6bn or 19% of GAM’s MYR24bn outstanding orderbook. DTI has secured c.AUD400m (c.MYR1.2bn) of new contracts post acquisition of Downer EDI’s projects by GAM in Jun 2023. If we assume DTI has a 50% share in the HCS project (estimated total contract size is well in excess of AUD1bn) – it may see an orderbook accretion of at least AUD500m – potentially bringing DTI’s new job wins in FY24F to c.AUD0.9bn at the minimum.

• New job win target of MYR25bn over FY24F and FY25F within reach. Based on our estimates – GAM has so far secured c.MYR6bn worth of new jobs (including DTI) for FY24F. Anticipated near-term projects aside from the HCS include the second tunnelling package for Suburban Rail Loop East (Glen Waverley to Boxhill) (estimated at AUD2-4bn), phase 1B Pan Borneo Highway Sabah (average contract size of MYR700-800m), and segment 1 of Penang LRT Mutiara Line (received an offer by the Federal Government but contract value estimated at MYR6-10bn to be finalised within six months).

• No changes to our earnings estimates and hence our SOP-derived TP of MYR6.30, which bakes in a 6% ESG premium, is unchanged. We view that GAM’s current 14x FY25 P/E is undemanding as it was trading around 16x P/E in mid-CY17 during the construction upcycle when its orderbook was only at MYR7.8bn vs c.MYR24bn now.

• A rerating catalyst would be consistent flow of wins for data centre jobs within the Klang Valley area as Gamuda completed the 8MW AIMS Cyberjaya data centre within a period of nine months.

• A key risk is slower-than-expected job replenishment trends.

Source: RHB Research - 8 Apr 2024