Gamuda's acquisition of solar energy firm puts it on track to become largest private RE producer

• MIDF Research added Gamuda remains the research firm's top pick for the construction sector, having premised on its effective diversification strategy out of Malaysia in a bid to become a strong regional player.

KUALA LUMPUR (Dec 8): Gamuda Bhd's planned 30% stake acquisition in ERS Energy Sdn Bhd for RM200 million via the subscription of shares is expected to help the group hasten its target of having an 800 MW renewable energy (RE) asset portfolio in the next few years, making it Malaysia's largest private RE producer.

PublicInvest Research analyst Chin Li Shan in a note on Thursday (Dec 8) said the associate company is expected to contribute RM12.9 million to the group's FY2024F net profit and RM15.5 million to the group's and FY2025F net profit, representing increments of about 2%.

"As per [Gamuda] management's guidance, ERS Energy will be looking at 20% to 30% growth per annum beyond FY23F.

"Though earnings contribution from ERS Energy may not be material at this juncture, we think the acquisition spearheaded Gamuda's Green Plan — to own over 800 MW RE asset capacity by FY2025 and be Malaysia's largest private RE producer," said Chin in a note.

Chin also deemed the purchase price fair as ERS Energy may carry a higher execution risk compared with its listed peers with regard to its ability and credibility.

She said the price tag of RM200 million in ERS Energy translates into a forward price earnings (PE) multiple of 13 times, which renders a discount to the price tag given that its peers' forward PE multiples were 19 times.

Meanwhile, MIDF Research believes there could be more acquisitions or partnerships by Gamuda in the green energy space as it focuses on securing RE concessions with strong cash flow with healthy internal rate of returns.

"Rather than having to grow a new business segment organically, Gamuda is able to fast-track this process through knowledge transfers and the acquisitions of the right talents and entities," it said in a note on Thursday.

MIDF Research added Gamuda remains the research firm's top pick for the construction sector, having premised on its effective diversification strategy out of Malaysia in a bid to become a strong regional player.

The firm observed this would also shield Gamuda from being too overly exposed to the ups and downs of the construction sector cycle in Malaysia, of which the roll-out of mega infrastructure projects remains obscure for now with potential delays or terminations.

"While we do not expect the Mass Rapid Transit Line 3 to be terminated as it is a crucial line to complete the rail network in the Klang Valley, we do not discount the possibility of a delay that could possibly come from reviews or revisions.

"Gamuda is among the favourites to secure package CMC303 with its partner MMC, which we estimated to be RM16.3 billion," said the research house.

Chin maintained an "outperform" call with an unchanged sum-of-the-parts-derived target price (TP) of RM4.30, while MIDF Research also maintained both its "buy" call and TP of RM4.71 for Gamuda, whereas AmInvestment Bank Bhd has a "hold" call with a fair value of RM4.32.

As of 11.45am on Thursday, Gamuda's share price was up six sen or 1.55% to RM3.94, bringing the group a market capitalisation of RM10.18 billion.