Gamuda downgraded despite RM54bil order book boost

Pahle, Gamuda Bhd has been reduced to a "hold" rating and its target price has been lowered to RM4.10 from RM5.50, despite boasting an RM54 billion order book and a revenue growth rate of 39.4% over the past three years. AmInvestment Bank, the firm behind the downgrade, expressed concerns over the company's financial headroom due to persistent negative free cash flow and a net gearing of 73%.

The bank pointed out that Gamuda's cumulative negative free cash flow of RM5.4 billion from FY2023-FY2025 highlights the "cash-intensive nature of its recent expansion drive". Additionally, the company's stock has seen a decline of 8.7% year to date, and nearly 20% over the past year.

AmInvest noted that while the order book provides "strong earnings visibility", it is increasingly capped by margin pressure, weaker cash generation, and higher leverage. They believe the backlog offers sufficient earnings support to limit downside, but the current operating and balance sheet risks lower the likelihood of further upgrades or valuation re-rating.

The bank highlighted that additional borrowings may be required to fund construction working capital and the RM10 billion property pipeline, which could raise financing costs. However, they maintained that the RM54 billion order book provides strong multi-year revenue visibility, which should continue to support earnings growth medium term due to approximately 75% of the backlog still at an early stage of execution.