- Maintain BUY on Gamuda with an unchanged fair value of RM5.26/share, pegged at a 5% discount to its estimated sum-of-parts value. Gamuda announced yesterday evening that it had entered into a share sale agreement to acquire a 100% stake in Salak Land Development Sdn Bhd for a total cash consideration of RM784mil.

- Salak Land is the beneficial owner of some 619 ha (~1,530 acres) of leasehold land (expiry on 6 Oct 2093) located next to the ELITE expressway (km 24 to km 26.4). The land is accessible via Jln. Klang-Banting and Jln B18, KESAS (from PJ or KL), and ELITE Highway (via KLIA interchange). It is currently classified as agriculture land.

- We are not entirely surprised by this move. Management had previously guided that it was scouting for more landbank within the Klang Valley, Sabah or Iskandar Malaysia. It represents Gamuda’s first major land purchase since its acquisition of some 724 acres of land in Rawang (RM620mil or ~RM20psf)) back in mid-2013.

- More importantly, we believe that the implied land cost is fair at RM12psf when stacked against its good growth prospects. Gamuda intends to develop the land into a new suburban township. Leveraging on the group’s established track record in township development (e.g. Kota Kemuning, Valencia, Horizon Hills and Jade Hills), we believe that this township will be similarly well received.

- Apart from its good accessibility, the said land is strategically located in South Klang Valley. It is within range of several emerging hotspots such as Bangi, Dengkil, Salak Tinggi and Putrajaya.

- Nevertheless, we believe this project will have a mid-tolonger term horizon – any valuation creation or critical mass will only likely kick in after five to seven years. We envisage the addressable market to be upgraders or homeowners within the mid- to slightly-upper middle income band as well as the catchment area down south including Nilai and Seremban.

- Several prime developments such as Mah Sing's Southville City @Bangi are already taking shape, while the scheduled opening of IOI City Mall, Putrajaya in November (85% take up to-date) should enhance the appeal of this growing corridor.

- We do not envisage Gamuda to face any issues in raising the required funds for this new landbank. Gamuda's FY15F net gearing would remain at a conformable 33% (now: 19%) even if it purchases the land entirely through borrowings. Likewise, we are keeping our earnings forecast and BUY recommendation on Gamuda for now pending more details on the said land.

Source: AmeSecurities