The Penang South Islands (PSI) reclamation project, as indicated earlier by the Government, will be slashed by 49% with the cancellation of Island B and Island C. To recap, the Penang State Government agreed to scale down the project after the Government announced that it will provide additional funds to expedite the construction of Bayan Lepas LRT. There will be no earnings impact to Gamuda in our view as the agreement signed between SRS Consortium and the State Nominee only covers Phase 1 of Island A reclamation project. Earlier this month, the Environmental Impact Assessment (EIA) approval for the Penang South Islands has been obtained from the federal-level Department of Environment (DoE). We expect reclamation works to commence by Q4FY23, assuming the Environment Management Plan (EMP) approval to take another 3-4 months. On top of that, we also expect the Bayan Lepas LRT under the Penang Transport Master Plan (PTMP) to kick-off sooner than expected (previously announced work to commence in the fourth year of Phase 1 Island A reclamation), assuming funding was secured from the Government. All said, we retain our forecasts and TP of RM5.10 as we have accounted for the PSI reclamation project into our FY23 orderbook replenishment assumption of RM15bn. Maintain Outperform.

• PFI structure recap. Gamuda through its 60% stake in SRS Consortium (SRS) in the Island A reclamation project plays a two-level participation under a 70:30 JV between SRS and State nominee i.e. a Project Developer (PD) as well as a Turnkey Contractor (TC). Gamuda is also the sole contractor for the Phase 1 Island A reclamation works, measuring 1,200 acres out of 2,300 acres, as per the signed agreement. This translates to RM4bn – RM4.5bn worth of orderbook over a reclamation period of 6 years, commencing by Q4FY23 with RM8bn to RM9bn to be recognized over 7 years. Land sales are expected to commence from the fourth year after reclamation has started.

• Funding. We estimate net profit recognition of RM304m - RM342m from this reclamation works by assuming a 10% pre-tax margin. We estimate this project would add roughly 20% to Gamuda’s outstanding orderbook of RM20.5bn. Separately, we expect the Group’s net gearing will be lifted to 0.6x from 0.4x, assuming the Group will be required to raise an additional c.RM2.5bn debt to cover the funding deficit amounting RM4bn in Year 4 (FY25) after deducting FY25F cash pile amounting to c.RM1.5bn. Total construction cost, including common infrastructure work, is expected to cost RM8.5bn, to be expensed over the duration up to 6 years. Nonetheless, Management reiterates that there is no obligation to complete Phase 1 within a fixed timeline. The rate of development will be purely driven by market demand.

Source: PublicInvest Research - 12 May 2023