KEY INVESTMENT HIGHLIGHTS

• 1QFY25 core net profit grew +2.9%yoy to RM199.8m; slightly below expectations but stronger quarters expected
• Construction revenue grew +37.9%yoy to RM3.09b; net profit grew +20.0%yoy to RM141.5m
• Strong order book at RM30.0b; potentially grow to RM40b-RM45b by end-CY25
• Maintain BUY with an unchanged TP of RM10.68

Slightly missed expectations. Gamuda Bhd recorded a core net profit of RM199.8m (+2.9%yoy) in 1QFY25, despite a stronger revenue of RM4.14b (+47.5%yoy). Sequentially, the core earnings declined - 26.4%qoq, attributable to a slight delay in recovery of construction margins from delayed domestic awards, outstanding variation orders (VOs) and an earnings void left by Celadon City in Vietnam. While the result came in at 15.4% of our and 16.7% of consensus full year estimates, we deem it as within given the expectations of stronger quarters ahead.

Construction margins to pick up. Construction revenue grew +37.9%yoy to RM3.09b, driven mainly by overseas projects while the segment's net profit grew +20.0%yoy to RM141.5m. Sequentially, there was an improvement in net profit margins, rising to 4.6% during the quarter (4QFY24: 4.0%). We expect margins to gradually improve with more domestic projects in the mix with the commencement of several high-margin local projects and stronger progress from ongoing jobs. In Penang for example, Gamuda has reclaimed 70 acres of land for Silicon Island and the progress is expected to improve with the addition of two new dredgers, doubling the current fleet to four.

RM40b to RM45b order book by end 2025. As at Oct-24, Gamuda's outstanding order book stood at RM30.0b, with Australia making up the bulk of it at 33.0% or RM9.9b. Management reiterated their order book target of RM30b to RM35b by end CY2024 and RM40b to RM45b by end CY2025. Note that this is after taking into account an expected burn rate of RM12b-RM13b annually. Upcoming project awards that are expected to provide an extra boost to Gamuda's already bulging order book include the Penang LRT, a water supply scheme in Sabah, and the potential conversion of several renewable energy early contractor involvement (ECI) into EPCC contracts in Australia. Meanwhile, management also guided that prospects remain strong in Australia's RE space, with a tender book of AUD25b over two years. Gamuda is already involved in at least six to seven single source developments and are in the process of securing a few more.

Temporary transition in property, RM6b target intact. Gamuda's property division recorded a revenue of RM1.10b (+81.9%yoy) during the quarter but its net profit dipped -17.0%yoy to RM63.9m, mainly due to the completion of Celadon City in Vietnam. The group's newer quick turnaround projects (QTPs) are expected to pick up and fill the earnings gap from Celadon City. Recent launches in Vietnam include the Eaton Park Phase 2, where 590 units were sold out in a weekend, with a total sales value of about RM1b.

Management also recently secured a new deal in Hai Phong with a GDV of RM1b. Management also expects more reservations from its Malaysia properties to be converted into confirmed sales in the coming quarters.

Differentiated DC delivery. Gamuda is bringing a new offering to the table for data centres with an integrated offering of "Bundled Land + Water + Power (RE)" that is able to provide even better speed to market, coupled with its Digital IBS capabilities. Management is optimistic on the pipeline of data centre projects and have been expanding its capacities to cater for the stronger demand. It has recently expanded both its Digital IBS facilities, and the group now has eight DC teams ready for up to eight simultaneous DC construction.

Digital infrastructure. As announced on Wednesday, Gamuda is venturing into the digital infrastructure business. Its wholly owned subsidiary Gamuda Technologies Sdn Bhd has forged a strategic partnership with DNeX Solutions Sdn Bhd to form a 50:50 JV that will deliver Google Distributed Cloud air-gapped services (GDC services) to the government and private clients. This is able to provide governments, financial service institutions and security-sensitive organisations access to Google's technology on physical hardware, including Google's latest on-premises AI capabilities and the ability to support secure data and AI workloads. Management has identified an addressable market of RM36b across all verticals.

Earnings estimates and TP. We maintain our FY25E/FY26F projections, and our TP of RM10.68, derived by pegging Gamuda's FY26F EPS of 52.1 sen to a PER of 20.5x, based on +2SD above its long-term mean, which we believe is justifiable given its growing prospects in the construction space with an all-time high outstanding orderbook of RM31.4b and its upcoming inclusion into the FBM KLCI starting 23rd December.

Maintain BUY. We expect an improvement in margins, especially from construction, when more local projects come into the mix. Gamuda remains our favourite for the construction sector, backed by its successful overseas expansion plan; its consistency in clinching sizeable jobs and it being a front runner for most mega projects in Malaysia. We are also sanguine on the group's venture into the digital infrastructure space, which addresses an untapped market. The stronger pipeline of data centre projects also bodes well for Gamuda, with its new integrated offering. All in, we are maintaining our BUY recommendation on Gamuda.

Source: MIDF Research - 13 Dec 2024