Diversification Strategy Overseas and Record High Order Book, BUY Rating on Gamuda: MIDF

Gamuda Berhad’s first quarter of financial year 2023’s (1QFY23) core net profit from continuing operations grew +28.2% year-on-year (yoy) to RM144.3 milliom, driven by stronger earnings contributions from both its construction and property divisions. The amount was arrived at after removing the one-off cash gain of RM1.11b from the sale of its toll concessions and its profit from the segment until the completion of the sale in October.

However, according to MIDF Research, Gamuda’s results were slightly below its expectations but in line with consensus, making up 17.7% and 20.4% respectively of full year estimates.

Better construction margins. The group’s construction division posted a profit before tax (PBT) of RM101.1m in 1QFY23, which was an increase of +3.2% yoy over 1QFY22, despite a -11.2% yoy decline in revenue to RM759.2m.

The PBT margin marked an improvement to 13.3% as compared to 11.4% in the same period last year, which was in line with the research house’s expectations of softening building material prices, on top of Gamuda’s ability to improve its productivity levels. Management guided that FY23 construction earnings are fairly secured while FY24 earnings would depend on the ramping up of newer projects.

Vietnam lifts property earnings. Gamuda’s property division recorded a PBT of RM73.2 million for the quarter, which was 2.6 times larger than the amount recorded in 1QFY22, on the back of a 2.4 times higher revenue at RM644.2 million. PBT margin saw an improvement from 9.6% to 11.4%. This was driven by the group’s projects in Vietnam amidst a strong property market.

Meanwhile, property presales saw a 43% decline to RM480 million for the quarter as its OLA project in Singapore and Celadon City in Vietnam were almost fully sold, while domestic presales were equivalent to the same quarter last year. Management has guided its presales target of RM4.5 billion for FY23, expecting the momentum in domestic presales to pick up in the next few quarters. Gamuda will be building up its quick turnaround projects (QTP) aggressively in the United Kingdom, Vietnam, Australia and Singapore. The group has unbilled property sales of some RM6b.

Record high order book. Gamuda’s outstanding construction order book remains at a record high of RM14.8 billion, giving it an earnings visibility up to FY26/FY27. These are mainly from overseas jobs which is now at a record high of RM14.8 billion, giving it an earnings visibility up to FY26/FY27. These are mainly from overseas jobs, which is now at RM11.6 billion or 78% of its order book, out of which RM8 billion is from Australia. The group also has RM2.1 billion worth of jobs in Taiwan and RM1.5 billion in Singapore and the remaining RM3.2 billion in Malaysia. MIDF is fairly confident that management is able to hit the target of securing RM25 billion worth of new jobs in two years. Gamuda’s tender win rate is about 40%.

MRT3 chances. MIDF has stated its optimistism on the Gamuda-MMC partnership to secure package CMC303 of MRT3, which is set to be the largest package of about RM16.3 billion, with an estimated 10km of underground works. This is based on their vast experience in MRT1 and MRT2, and Gamuda’s status as the tunnelling expert and the largest contractor in Malaysia.

The only setback, as highlighted in our 2023 Market Outlook, would be a delay in the contract awards. Note that MRT3 contracts were supposed to be awarded by 4QCY22.

The research house has reiterated its view that termination is not on the cards, as MRT3 is a crucial final piece to complete the urban rail network in the Klang Valley and its ability to pump prime the national economy in a post-Covid environment. Potential amendments if any, could be the shifting of the alignment and that is still unlikely at this juncture.

Management concurred that the start up of MRT3 will not be a fast one as the required land has yet to be acquired and the railway scheme has yet to be approved. MIDF remains hopeful of the MRT3 contract awards in 2023, which is set to be the bright spot for the sector.

Australia as a major market. Gamuda has set its sights on going huge in Australia, aiming to go it alone for projects in the land Down Under in the long-term. Management did not discount the possibility of acquiring a local capability to expand its presence in the country.

Investments into renewable energy (RE). Management has allocated RM2 billion for investments into the RE space over the next five years. They aspire to build a new recurring income division to replace the income from its recently divested toll concessions business. Among plans is to develop hydro plants, locally and overseas.

The rationale is for Gamuda to secure the construction earnings up front as infrastructure contractors and move on to concession type returns as the asset owners. Among other forms of RE being considered are waste and solar.

Recall that Gamuda is acquiring a 30% stake in ERS Energy, a solar energy engineering, procurement, construction and commissioning (EPCC) firm for RM200 million. Instead of its EPCC capability, the group intends to play front runners in the Corporate Green Power Programme (CGPP) via ERS Energy’s New Enhanced Dispatch Arrangement (NEDA) quota, which is the backbone of the CGPP.

Dividends galore. Gamuda declared its first interim dividend of 6 sen per share for FY23. It will also be paying out a special dividend of 38 sen per share on Friday, to reward shareholders out of the RM2.33 billion of proceeds that it received from the disposal of its four major highway concessions – Kesas, Sprint, Litrak and Smart – to Amanat Lebuhraya Rakyat, which marked Gamuda’s exit from the toll concession business.

Earnings estimates. MIDF is retaining our top and bottom-line estimates for Gamuda. Target price. However, it is revising our TP to RM4.67 by pegging a forward PER of 15x based on +0.5SD above its three-year historical mean to the group’s FY23 EPS of 31.1 sen, taking into account its enlarged share capital following the exercise of its employee share option scheme (ESOS) on Dec 14 which saw the issuance of 396.9k new shares at RM2.85 per unit and the issuance of 37.1m new ordinary shares on Sept 5 due to its dividend reinvestment plan.

From its diversification strategy overseas and the behemoth player that it is in Malaysia, Gamuda remains MIDF’s top pick for the sector.

Its growing presence in the region shields it from being too exposed to a single country, such as Malaysia. We are still cautiously optimistic on the construction sector domestically on the back of potential delays and reviews of mega projects but issues such as elevated building material prices and labour shortage have started to dissipate.

While MIDF had initially projected a slight drop in Gamuda’s earnings due to disposal of its toll concessions, it seems that this will quickly be replaced by its stronger construction and property earnings. Management guided that the group’s bottom line for FY23 will at least match FY22, if not higher.

All factors considered, MIDF has reiterated its BUY recommendation on Gamuda.

Previous articleForeign Investors Continue To Be Net Sellers Albeit At Lower Rate
Next articlePETRONAS Upbeat On Stable Growth Into 2023 And Beyond Amidst Continuing Energy Market Imbalances

LEAVE A REPLY

Please enter your comment!
Please enter your name here