• Maintain BUY and SOP-based MYR9.68 TP, 31% upside and c.2% FY25F (Jul) yield. UPP Holdings, a JV company comprising Gamuda (45%), Sabah Energy Corporation (40%) and Kerjaya Kagum Hitech JV (15%) via its subsidiary Upper Padas Power (UPP) has accepted the Letter of Notification from the Energy Commission of Sabah on 6 Sep for the development of the Ulu Padas Hydroelectric Project (UPH) (187.5MW capacity). Aside from providing recurring income, the UPH project paves way for GAM to strengthen its foothold in renewable energy projects domestically.

• Recall that the JV company was formed in Oct 2023 to pursue the private finance initiative to develop UPH. The estimated total project cost is c.MYR4bn including interest during construction with a minimum debt-to- equity ratio of 80:20 for funding (debt portion may be fixed higher). Excluding interest costs and assuming GAM would undertake the bulk of construction (75-85% share in our view) – the orderbook attributable to GAM could be in the range of MYR2.8-3.2bn. Additionally, UPP is required to build a floating solar solution as one of the conditions in the letter of notification.

• Timeline. The signing of the 40-year power purchase agreement (PPA) for UPH may take place by end-CY24, followed by the commencement of construction works in early CY25, in our view. Major construction works are targeted to be completed within six years from inking the PPA with the scheduled commercial operation date to be on or before 31 Dec 2030.

• The UPH project is expected to generate revenue exceeding MYR400m pa. Assuming a conservative 10% PBT margin and 45% effective share, GAM could generate additional earnings of at least MYR18m pa from UPH. Tariff wise, we estimate it to be in the region of MYR0.28-0.35kWh for UPH by benchmarking tariffs of existing hydropower projects in Sabah such as Jentayu Sustainables’ (JSB MK, NR) 40MW Telekosang Hydro project.

• No changes to earnings estimates as contribution from UPH may begin on or before 31 Dec 2030 (beyond forecast horizon). By applying a DCF valuation (WACC: 7.3%, availability factor: 90%) using the assumed tariffs above, we estimate UPH to bring an equity value of MYR400-600m or MYR0.14-0.21 per share (based on 45% share in JV) to our SOP valuation. We have yet to impute UPH into our SOP valuation pending the signing of the PPA.

• Our TP remains unchanged at MYR9.68, which bakes in an 8% ESG premium. We reaffirm our view that GAM remains undemanding vs other large cap peers, trading at a FY25F P/E of 17.3x which is also not far from the 16x P/E seen during the 2017 upcycle when outstanding orderbook was just c.MYR7.8bn vs MYR24-26bn now (excluding UPH). Our expectation of job wins to at least MYR10bn pa backs our 3-year earnings CAGR (2023 to 2026) of 16%. Rerating catalysts: Faster-than-expected wins for domestic jobs (which fetch higher margins) in the infrastructure and data centre space.

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

Source: RHB Research - 9 Sep 2024