RHB upgrades Gamuda to ‘buy’ with higher TP of RM4.95

• RHB Investment in a note on Friday (June 9) said that about 88% of Gamuda’s outstanding order book is from overseas, thus warranting its upgrade, implying a 20% upside and circa 3% FY2024 (Jul) yield.

KUALA LUMPUR (June 9): RHB Investment Bank upgraded Gamuda Bhd to “buy” from “neutral”, with a new RM4.95 target price (TP) from RM4.35, as the research house views the stock as a strategic hedge towards downside risks from the local construction sector, given its sizeable overseas footprint.

RHB Investment in a note on Friday (June 9) said that about 88% of Gamuda’s outstanding order book is from overseas, thus warranting its upgrade, implying a 20% upside and circa 3% FY2024 (Jul) yield.

It noted that excluding the MSCI Index rebalancing exercise on May 31, the percentage of Gamuda shares traded daily under the KL Construction Index remained low (under 20%) since the February spike, implying opportunities to accumulate in light of better overseas prospects. 

Meanwhile the research firm noted that the Sydney Metro West project is progressing well, with roadheaders carving out tunnels, citing a media report in late May. 

“The outcome for the bids of the Suburban Rail Loop (SRL) East tunnelling works is expected to be known towards end-CY2023. In addition to the normal infrastructure projects, the group is also eyeing renewable energy (RE) projects such as hydropumps in Tasmania,” RHB Investment added.

Aside from its bid for the CMC03 tunnelling package for the Mass Rapid Transit 3 (MRT3), Gamuda has also been pre-qualified for the systems package (estimated at RM6.3 billion). 

Its exposure in the Second Trunk Road and Pan Borneo Highway (PBH) Sarawak would enable the group to have a higher chance of securing packages from the remaining phases of the PBH, be it in Sarawak or Sabah, RHB Investment said. 

“Therefore, we think that our FY2024-2025 job replenishment target of RM13 billion and RM10 billion is reasonable at this juncture,” it added.

Meanwhile, the reseach house said the scaling down of the Penang South Islands (PSI) has no impact on Gamuda, as existing agreements with the Penang State Government (PSG) only relate to Island A. 

The Federal Government’s plan to fund the Bayan Lepas Light Rail Transit (BLLRT) may also reduce the funding risk for Gamuda, as the BLLRT was supposed to be financed by the proceeds of land sales from the reclaimed islands.

As there is now greater focus on the critical climate change issues, RHB Investment also tweaked its ESG weightage for Gamuda.

“Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars,” it added.

Nevertheless, RHB Investment said it has now segregated the construction segment into the Malaysian and overseas divisions in its sum-of-parts(SOP) valuation. It also adjusted its property segment’s discount to RNAV to 60% from 65%, premised on the ability of the Vietnam property market to continue to attract foreign investors, despite headwinds faced by local developers. 

Notably, 90% of Gamuda’s total overseas gross development value (GDV) comes from projects in Vietnam. “As a result, we arrive at a new SOP-derived TP of RM4.95, which includes a 2% ESG premium on the intrinsic value based on an ESG score of 3.1,” the research firm added.