Investment Highlights

• We maintain BUY on Gamuda with an unchanged SOP-based fair value (FV) of RM4.73/share. Our FV reflects a 3% premium for its 4-star ESG rating and implies a FY24F PE of 14x, 1 standard deviation above the group’s 5-year average of 12x.

• Gamuda and Castleforge, via Venta Belgarum II (VB II) has proposed to acquire the entire equity interest in Wessex Winchestor Propco, the owner of Winchester House London from Wessex Winchester. Gamuda will have a 75% equity stake in VB II and Castleforge the remaining 25%.

• Founded in 2010, Castleforge has invested GBP1bil in asset value throughout UK and Europe, delivering 2.4mil ft2 of office space. Notable projects include 160 Aldesgate which achieved a Building Research Establishment’s Environmental Assessment Method (BREEAM) excellence scoring of more ≥ 70%, fully preleased and sold in 2017 with IRR of 20%.

• The equity portion of GBP69mil amounts to 27% of the total purchase consideration of GBP257mil (RM1.4bil). The remaining 73% will be funded by a capital management firm specialising in real estate debt (Exhibit 1).

• For Gamuda, the consideration of GBP52mil (75% of GBP69mil) will be fully funded by debt. Gamuda’s net gearing will inch up to 0.2x from 0.1x post-acquisition. Nonetheless, Gamuda intends to syndicate part of its 75% equity stake to interested investors post completion of the proposed acquisition, prior to the construction. This will pare down Gamuda’s ownership in VB II to associate level, in which VB II’s financial statements will be accounted under the equity method for the group.

• We deem that the acquisition price of GBP809 psf to be reasonable as Winchester House was acquired at a 6%-33% discount to the Grade B offices with prices ranging from GBP820 psf to GBP1,128 psf (Exhibit 2).

• Winchester House London’s current lease to Deutsche Bank AG as the bank’s London headquarters is due to expire in April 2024. The bulk of rental income from the lease will be used to repay the financing cost of the acquisition. Hence, the earnings impact on Gamuda is minimal. Overall, we are neutral on this development.

• Upon the expiry of the lease, Gamuda intends to:
  • Refurbish the building from 8 storeys (317k ft2) to 11 storeys (493 ft2). The total project cost, including the acquisition cost of GBP257mil and development cost and fees of GBP476mil, amounts to GBP733mil;
  • Upgrade the building’s ESG credentials to best-in-class, i.e., BREEAM Outstanding with a score of more ≥ 85%. We believe this will be made possible by Castleforge’s extensive track record and Gamuda’s prior experiences;
  • In line with Gamuda’s quick-turnaround project (QTP) strategy, Gamuda intends to monetise the building within 5 years, i.e., by 2027F upon the full lease-up of the building (which may also occur on prelease arrangements prior to building completion). Only <2% of office spaces in the City of London have achieved the BREEAM Outstanding rating.
• Gamuda is currently trading at an attractive 12.4x FY23F PE, below its 5-year peak of 15x.

Source: AmInvest Research - 28 Mar 2023