Analysts maintain 'buy' on Gamuda, expect strong quarters ahead on high order book, unbilled sales

• There are currently 20 "buy" calls and only one "sell" call on Gamuda, with a 12-month average target price (TP) of RM5.34, Bloomberg data showed.

KUALA LUMPUR (Dec 7): Market watchers have maintained their "buy" ratings on Gamuda Bhd, as they expect the engineering and construction group to deliver strong quarters ahead for the financial year ending July 31, 2024 (FY2024), on the back of a record-high order book and unbilled sales.

There are currently 20 "buy" calls and only one "sell" call on Gamuda, with a 12-month average target price (TP) of RM5.34, Bloomberg data showed. Among the analysts covering the stock, AmInvestment Bank Bhd stands out as the most optimistic, with a TP of RM6.73, while Macquarie has the lowest TP of RM3.85.

Gamuda's results for the first quarter ended Oct 31, 2023 (1QFY2024) drew mixed reactions from analysts covering the stock. Some stated that the quarterly results were in line with their expectations, while others said that the figures were below their forecasts.

Gamuda reported a core net profit of RM195 million for 1QFY2024, constituting 20% of RHB Investment Bank Bhd's full-year projection, and 19% of the consensus. RHB viewed the results as in line, highlighting that the first financial quarter typically represents the weakest period of the year, especially for the property division, which experienced slower sales at the beginning of FY2024.

RHB maintained its "buy" recommendation for Gamuda, citing the company's resilient position due to its diverse geographical presence, generating 70% of profits from overseas markets while remaining involved in substantial projects domestically.

“We maintain our earnings estimates, but roll forward our sum-of-parts (SOP) valuation base year to FY2025. As such, we derive a new SOP-derived TP of RM5.66 (from RM5.41), after baking in a 4% ESG (environmental, social and governance) premium.

“Gamuda’s current market valuation of 11 times FY2025 price-earnings (P/E) is unjustified, as it was trading at 16 times P/E in mid-2017 during the construction upcycle, when its order book was only worth RM7.8 billion, compared with RM25.8 billion now. A further rerating catalyst would be faster-than-expected wins for local and overseas jobs, particularly for the Mass Rapid Transit 3 (MRT3) project, which had its tender validity extended to March 2024,” said RHB.

Gamuda's 1QFY2024 performance also aligned with Hong Leong Investment Bank's (HLIB) expectations, constituting 20% of the research house's full-year forecast. Anticipating a gradual improvement in Gamuda's property division in the upcoming quarters, and an upward trend in construction margins, HLIB maintained its "buy" recommendation.

HLIB’s TP for Gamuda was unchanged at RM5.15 — based on a 10% discount to the SOP value — which is assessed at RM5.72. Its TP implies reasonable forecast P/E multiples of 13.9 times for FY2024, 13.3 times for FY2025, and 12.5 times for FY2026.

“[Gamuda’s] unbilled sales stayed impressive at RM6.7 billion. The management has maintained its RM5.6 billion target for FY2024, as sales are expected to accelerate, driven by the maiden launch of Gamuda Parks and overseas quick-turnaround-projects.

“[There are] no changes to [our] FY2024/FY2025 forecasts. [We] introduce [our] FY2026 core profit after tax and minority interest (Patami) forecast of RM1.08 billion. On current valuations, the stock remains attractive, trading at FY2024/FY2025/FY2026 P/E multiples of 12.2 times/11.7 times/11.0 times, despite still being in an earnings upcycle,” said HLIB.

Public Investment Bank Bhd and MIDF Investment Bank Bhd took different views, noting that Gamuda's 1QFY2024 results fell short of their full-year expectations at 15.6% for Public Investment and 17.9% for MIDF, citing that the group's construction billings were still in an early stage.

Public Investment maintained its forecasts and "outperform" recommendation, with an unchanged TP of RM5, which is 15 times the sector's average P/E.

MIDF, meanwhile, adjusted its TP to RM5.55, up from RM5.38, by applying a P/E of 13 times. This valuation methodology involves adding one standard deviation above the three-year historical mean to the group's projected FY2025 earnings per share of 42.7 sen.

“Gamuda remains our top pick for the construction sector, backed by its strong overseas expansion plans, and its consistency in clinching sizeable jobs. Its bulging order book of almost RM26 billion provides strong earnings visibility at least over the next three financial years, and in Malaysia, its prospects remain bright, as we can expect Gamuda’s involvement in the MRT3, Penang Light Rail Transit (LRT) and Pan Borneo Sabah projects.

“In Australia, the newly acquired DT Infrastructure places Gamuda in a sweet spot to undertake more and larger infrastructure projects, especially rail. The group’s balance sheet also remains healthy, with a net gearing of 24.7%, well below its self-imposed limit of 70%. All factors considered, we maintain our 'buy' recommendation for Gamuda," MIDF added.

At Thursday's noon break, shares in Gamuda were three sen or 0.68% higher at RM4.44 each, translating into a market capitalisation of RM11.98 billion for the group.

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