Gamuda Bhd is solidifying its regional excellence with a slew of good news for its construction arm, along with positive first quarter results.
Consequently, RHB Investment Bank (RHB IB) keeps its BUY call, and increase Sum-Of-Parts (SOP)-based TP to RM5.66 from RM5.41, 28% upside with 3% FY24F yield, after baking in a 4% ESG premium.
“We maintain our earnings estimates but roll forward our SOP valuation base year to FY25. Gamuda’s current market valuation of 11x FY25 P/E is unjustified, as it was trading at a 16x P/E in mid-2017 during the construction upcycle when its orderbook was only worth RM7.8 billion compared to RM25.8 billion now,” the research house said in its Results Review today (Dec 7).
Gamuda’s 1QFY24 (July) core net profit of RM195 million, up by 2.4% year-on-year (YoY), as 1QFY23 still had residual recognition from the toll highways) made up 20% and 19% of RHB IB’s and Street full-year projections.
“We deem the results as in line, as 1Q is usually the weakest quarter – sales chalked by its property division have yet to pick up at the start of the financial year.
“Our BUY call is due to its diverse geographical base (70% of Gamuda’s profit from overseas), even as it remains relevant in sizeable projects at home,” it said.
RHB IB said Gamuda’s construction arm recorded a PBT of RM133 million, up by 31% YoY for 1QFY24 – mainly contributed by the Sydney Metro West (SMW) project which reached 39% completion (including variation orders) as at Oct-end compared to 7% a year ago.
“The lower PBT margin of the construction arm of 5.9% in 1QFY24 (1QFY23: 13.9%) is reasonable, given the absence of the Mass Rapid Transit (MRT) 2 project which supported margins in FY22 and FY23 as cost buffers were restored towards the tail-end of the project.”
Meanwhile, its property segment’s PBT surged 46% YoY in 1QFY24, with domestic projects accounting for 61% of sales.
“We expect earnings of the property arm in the subsequent quarters to increase further, backed by quick turnaround projects (QTPs) such as Elysian and Artisan Park in Vietnam and West Hampstead Central in London which make up 10% of the GDV under QTPs.
“Moreover, the property arm’s unbilled sales stand at RM7.6 billion, as of 1QFY24 versus RM5.8 billion, as of 1QFY23,” RHB IB added.
The research house said Gamuda’s construction orderbook stood at RM25.8 billion as of Dec 6, after including the job win for the West Coast station and tunnels of Singapore’s Cross Island Line phase 2 worth RM1.8 billion announced yesterday – translating to a 4.2x cover ratio.
So far in FY24, the group has secured RM8 billion worth of new contracts.
“We think that the RM25 billion new job win target over FY24-25 is still achievable – potentially coming from the second package of the Suburban Rail Loop East, Penang Light Rail Transit and phase 1B of the Pan Borneo Sabah Highway.
“Additionally, in Australia, the group was recently shortlisted for a highway project in Melbourne (exact project yet to be disclosed) while the Premier of New South Wales Chris Minns proposed that the Rosehill Racecourse is to be transformed into a new metro station under the SMW project.
“Its tunnel boring machine launch site for the SMW project is in Rosehill area – spelling more potential opportunities for the group,” it said.
RHB IB added a further re-rating catalyst would be faster-than-expected wins for local and overseas jobs – particularly for MRT3 which had its tender validity extended to Mar 2024 while the downside risks include slower-than-expected job replenishment trends.
Meanwhile, GGS-CIMB also echoes the same sentiment, saying that Gamuda’s current valuations of 12x CY24F P/E and 1.0x CY24F P/BV (1 s.d. below 18-year mean) look extremely compelling, in its view, considering its strong growth trajectory and record orderbook.
Thus, the research house reiterates its ADD rating, and SOP-derived TP of RM5.65.
“Gamuda’s 1QFY7/24 results met our expectations, construction revenue driven by overseas projects while property presales will catch up in upcoming quarters,” it said.
The research house said it is confident of Gamuda’s ability to execute its infrastructure projects in Australia, which has become an important market, contributing 47%, or RM12.1 billion of its total orderbook of RM25.8bn as at Dec 23.
“Gamuda targets to double its Australian revenue to a sustainable A$3 billion per year in 2-3 years’ time but the challenge is to reduce its overheads, by offshoring some of the detailed design work to Malaysia to lower costs.
“We understand that there could potentially be a 1-2% pt margin uplift beyond the pretax margin guidance of 8% for its Australia projects.”
The key downside risks to CGS-CIMB call are potential labour issues locally and abroad, which could derail its construction progress, delays in job awards, and higher raw material costs while the key rerating catalysts are stronger construction wins and property sales.
