PETALING JAYA: Gamuda Bhd has been downgraded despite having a RM54 billion order book as it grapples with profit margin pressure and balance sheet risk.
AmInvestment Bank (AmInvest) downgraded the construction and property group to “hold” from “buy” and lowered its target price to RM4.10 from RM5.50.
At the time of writing, the stock was trading at RM4.51, giving it a market capitalisation of RM26.89 billion. It is down 8.7% year to date, and nearly 20% over the past one year.
AmInvest said while Gamuda’s RM54 billion outstanding order book continues to provide “strong earnings visibility”, upside is increasingly capped by margin pressure, weaker cash generation and higher leverage.
“We believe the backlog provides sufficient earnings support to limit downside, while current operating and balance sheet risks reduce the likelihood of further earnings upgrades or valuation re-rating,” it said in a note.
It highlighted that persistent negative free cash flow (FCF) and net gearing of 73% reduce Gamuda’s financial headroom.
The bank noted it recorded cumulative negative FCF of RM5.4 billion in FY2023-FY2025, despite delivering 39.4% revenue compound annual growth rate (CAGR) over the same period, reflecting the “cash-intensive nature of its recent expansion drive”.
AmInvest said additional borrowings may be required to fund construction working capital and its RM10 billion property pipeline, raising financing costs.
Nevertheless, it noted that Gamuda’s RM54 billion outstanding order book provides strong multi-year revenue visibility and reduces the risk of a sharp earnings slowdown.
“With around 75% of the backlog still at an early stage of execution, project ramp up should continue to support earnings growth over the medium term,” it said.
However, it noted prolonged fuel and logistics cost inflation could pressure margins, particularly as an estimated 65% of its order book is fixed-price contracts.
Moving forward, AmInvest said a meaningful improvement in FCF and balance sheet deleveraging would also strengthen the case for a higher valuation multiple, while sizeable contract wins could extend its already strong earnings visibility.
Gamuda’s operations span Malaysia, Australia, Taiwan, Singapore and Vietnam. Its construction division undertakes large-scale rail, road, tunnelling, water and data centre projects. Malaysia and Australia collectively account for 76% of the construction backlog.
