KUALA LUMPUR (Oct 31): Gamuda Bhd's hydropower joint venture in Sabah is expected to boost its order book by between RM1.8 billion to RM3 billion, putting it on track to meet the RM13 billion target for the financial year ended Dec 31, 2024 (FY2024) set by analysts.
In a note on Monday, HLIB Research said a consortium comprising Gamuda and Kerjaya Kagum Hitech JV Sdn Bhd (KKHJV) — one of the companies it will be setting up a joint venture company (JVCo) with to develop the plant — would serve as the turnkey contractor.
It expected Gamuda to play a leading role in the partnership, with an estimated 60% stake in the consortium.
"At an estimated construction costs of RM3-3.5 billion, effective order book uplift could amount to RM1.8-2.1 billion. Nevertheless, this uplift is only expected to materialise in 1HCY2024 when the PPA [power purchase agreement] (at least 40 years) is executed with Sabah Electricity Corp Sdn Bhd [SEC]. Construction of the plant will commence once the PPA is executed and will stretch five years," it said.
HLIB said it is also expecting the construction phase of the project to generate an average annual profit after tax of RM30 million to Gamuda.
"However, once the plant commences operations possibly in CY2029, it could generate a recurring income stream to Gamuda of [around] RM70 million per annum (preliminary estimate given lack of details). We believe the power plant coupled with contribution from [ERS Energy Sdn Bhd] replaces highway earnings — based on FY2022 contribution.
"This development could help ease volatility in Gamuda’s future earnings profile and drive a potential rerating," it said.
In Dec 2022, Gamuda announced that it will subscribe to a 30% equity stake in solar energy firm ERS for RM200 million.
Meanwhile, Kenanga Research said it assumes that the hydropower plant project will generate around RM2 billion worth of civil works to Gamuda, which raises its outstanding order book to RM25.6 billion.
"This is the second of the six big-ticket projects Gamuda expects to win by Apr 2025. This is also the second key job Gamuda has secured in FY2024, boosting its FY2024F year-to-date total job wins to RM5 billion (on track to meet our FY2024F full-year job win assumption of RM13 billion) and its outstanding construction order book to RM25.6 billion.
"Other than the [RM3.45 billion] Taiwanese MRT job (won last week) and this latest hydropower plant, the rest could potentially comprise the Bayan Lepas LRT Line, MRT3, Pan Borneo Sabah highway and one contract from Australia," it said.
RHB Research, on the other hand, said it believes that Gamuda would take on the bulk of the construction work as part of the turnkey contractor consortium with KKHJV, thus it could recognise RM2.5-2.8 billion worth of order book value from the project, assuming it takes a 70% share of the RM4 billion construction cost.
"Therefore, Gamuda’s unbilled order book could rise to circa RM27 billion as a result of this project. Construction works are expected to commence in 1HCY2024, and to be completed in five years," it said.
According to CGS-CIMB, the hydropower plant project puts Gamuda's YTD wins at around RM6 billon, bringing its outstanding order book to RM27.8 billion. This also puts the company on track to hitting its RM25 billion target for new orders for FY2024 and FY2025, it added.
"As this is a PFI project, the project would be non-cash flow in nature over the construction period but would provide Gamuda with strong recurring income for more than 40 years post-2029F and help fill the void left by the sale of its toll road business in 2022.
"The JV partners plan to fund the project with a minimum debt-to-equity ratio of 80:20. There would be no impact on Gamuda’s balance sheet as it only has a 45% stake."
HLIB Research kept its “buy” rating on Gamuda, but raised its target price (TP) to RM5.15 from RM4.93 based on a 10% discount to sum-of-parts value of RM5.72.
"Our TP implies a justifiable FY2024f/2025f P/E multiple of 14.2 times/13.6 times. On current valuations, the stock remains attractive trading at FY24f/25f P/E multiple of 12.7 times/12.1 times despite still being in an earnings upcycle."
Meanwhile, Kenanga Research maintained its “outperform” call and TP of RM5.45, which includes a 5% premium thanks to its four-star ESG rating.
CGS-CIMB also kept its “add” rating and SOP-based TP of RM5.65. "Its current valuations of 12 times CY2024F P/E and 1.0 times CY2024F P/BV (1 standard deviation below 18-year mean) still look extremely compelling, in our view, considering its strong growth trajectory and record order book."
RHB Research, meanwhile, kept its “buy” call and SOP-derived TP of RM5.31. "We view that Gamuda's current 12.9 times FY2024 P/E is unjustified, as it was trading at 14 times P/E in mid-CY2017 during the construction upcycle, when its order book was only at RM7.8 billion compared to over RM20 billion now.
"Our buy call is premised on Gamuda's diverse geographical base for its construction and property arm, with circa 50% of profit coming from overseas," it said.
On Monday, Gamuda announced that it will be setting up a joint venture company to develop a 187.5MW hydroelectric power plant in Tenom, Sabah, through a private finance initiative with the total project cost estimated at around RM4 billion, including interest during construction.
Gamuda will be setting up a JVCo with SEC and KKHJV called UPP Holdings Sdn Bhd.
Gamuda will hold a 45% stake in the JVCo, while SEC will hold 40% and KKHJV will own the remaining 15%.
The project will be delivered by UPP Holdings' unit Upper Padas Power Sdn Bhd and is estimated to have a construction period of five years and an initial operating period of 40 years.