WITH the Australian government planning to pump billions into rail infrastructure, Gamuda Bhd’s investment in New South Wales-based rail construction outfit Martinus Rail Pty Ltd could not have come at a better time.
However, analysts contacted by The Edge say it will not be easy for Gamuda to make Australia its next growth frontier, given the expected high bidding cost and greater competition in the country.
“Yes, there are huge jobs available in Australia with some estimates putting the value of upcoming railway construction jobs at A$20 billion (RM56 billion). However, bidding costs in Australia could be very high, sometimes up to 15% of the contract value. This means a company might have to earn at least 20% margins to be profitable,” says an analyst who declined to be named.
Joshua Ng, an analyst with AmInvestment Bank, says investors should be mindful of the potentially hefty cash burn Gamuda would probably have to suffer in the initial years. There is also no guarantee of success in the new market, he adds.
“We believe that building a presence, gaining a foothold and ultimately being able to make money in a new market is no stroll in the park. Gamuda’s bold decision to venture into the Australian construction market is perhaps a manifestation of the belief that the best days of the Malaysian construction sector are behind us,” Ng says in a Sept 30 report.
Last Wednesday, the company announced that it had agreed to buy 50% equity interest in Martinus Rail for an undisclosed sum. The latter, described as a smallish outfit, has delivered projects exceeding A$200 million in New South Wales, Victoria and Queensland.
According to an analyst who attended a briefing by Gamuda’s top management on Sept 27, the group will be paying a lot less than RM100 million for the 50% stake. This is because its top management has guided that Martinus Rail’s revenue is around A$40 million, he adds.
A net profit margin of 5%, for example, gives Martinus Rail earnings of A$2 million. Ascribing a price-earnings ratio (PER) of 15 times to the company, it should be worth around A$30 million, which would value Gamuda’s portion at A$15 million (RM42 million).
Due to its small size, Martinus Rail has only been able to bid for jobs that are worth less than A$50 million, the analyst tells The Edge. This is one of the reasons the company has found a good partner in Gamuda, which has a proven track record in undertaking huge projects.
Indeed, founder and managing director Treaven Martinus’ statement on the partnership says that with Gamuda’s substantial balance sheet and experience, Martinus Rail’s future is bright.
Meanwhile, its general manager of new business and strategy, Ryan Baden, says the partnership is the next step in Martinus Rail’s journey towards becoming one of Australia’s leading rail infrastructure contractors.
“We have grown significantly in recent years but further growth required another level of financial strength and experience in delivering more complex projects across all contract models,” he says in a statement.
Does Gamuda have a strong balance sheet?
In its financial year ended July 31, 2019, Gamuda’s current ratio — the measure of how much current assets there are to fund current liabilities — stood at 1.58 times compared with 1.97 times in the previous financial year and 2.5 times in FY2017. In FY2014, it was 3.17 times.
However, Gamuda’s interest cover is still healthy at 7.73 times in FY2019. Though it was higher in FY2018 at 8.7 times, it was still on the high side in FY2019 compared with that of Gamuda’s peers.
For example, IJM Corp Bhd had an interest cover of 4.46 times while that of Ekovest Bhd and WCT Holdings Bhd stood at 1.97 times and 1.96 times respectively. For Sunway Construction Group Bhd, the interest cover was 21.63 times.
Gamuda’s balance sheet is expected to get a boost once the takeover of its four inner-city highways by the Minister of Finance Inc is finalised, if at all. However, a chunk of the RM2.67 billion proceeds might be used to finance the construction of Island A under the Penang Transport Masterplan (PTMP).
“There is a plan for Gamuda to fund the construction of Island A to get the project rolling. The Penang government will then sell parcels of land on the island to investors, and the proceeds will be used to pay Gamuda and finance PTMP,” says an analyst who covers the company.
Gamuda derived 36% of its profit before tax in FY2019 from property, 31% from construction and 33% from concessions.
Tough competition in Aussie construction industry
Despite the expected huge cost of penetrating Australia’s construction industry, it cannot be denied that the opportunities are aplenty as the government is ramping up spending on infrastructure development.
In a statement issued by Gamuda announcing the investment, Daniel Havas, Australia’s Senior Trade and Investment Commissioner to Malaysia, says the country has an estimated A$300 billion worth of infrastructure investment in the pipeline.
According to the BIS Oxford Economic Report published in July, rail infrastructure works in Australia are expected to grow 14% per annum until 2023, and as much as A$20 billion of rail projects will be implemented between this year and 2023.
Gamuda is looking to bid for up to A$8 billion (RM22.4 billion) worth of projects, and is confident of securing contracts worth between 20% and 25% of that value, says a spokesperson of the group when contacted by The Edge last Wednesday.
“The Inland Rail project, which is a 1,700km freight railway, as well as Metro projects in Sydney, Melbourne, Perth and Brisbane are some of the jobs Martinus Rail and Gamuda will bid for,” the spokesperson says.
Macquarie Research in a Sept 30 report says Gamuda’s management has guided that profit before tax margins could be around 5% to 8%.
“While Martinus Rail is small, Gamuda believes the company accords it ample access to start bidding for potential rail projects in Australia,” the research house says in the report.
If Gamuda manages to secure 25% of the A$8 billion worth of contracts it wants to bid for through Martinus Rail over the next five years, the company could be looking at potential earnings of between A$100 million and A$160 million.
While the outlook is good, Gamuda will come up against local construction giants in a tough race for a slice of the pie. An analyst points out that tier 1 construction companies in Australia will look at Gamuda as another competitor.
“Gamuda can do whatever the Australian tier 1 construction companies can do. They might not want another competitor in their market,” says the analyst.
The tier 1 construction companies in Australia include John Holland Pty Ltd, which is a wholly-owned indirect subsidiary of China Communications Construction Co Ltd, and Downer Group, which has partnered CRRC Changchun on several rail projects in the country.
Gamuda closed at RM3.60 last Thursday, valuing the group at RM8.9 billion. Between Jan 2 and Oct 3, it gained 53.2%, outperforming the Bursa Malaysia Construction Index, which rose 28.96%.