- RM27bil Penang Transport Master Plan. In this report, we highlight several evolving trends that may underscore the property up-cycle in Penang. At the core is the RM27bil Penang Transport Master Plan (PTMP), an ambitious project to drive the convergence of infrastructure and connectivity via an undersea tunnel, LRT, five new highways as well as a revamped public transportation system. Mooted by the Penang state government back in 2008, the request for proposals (RFPs) will close in February 2015 with the shortlisted Project Delivery Partners (PDPs) to be announced within six months. Based on our channel checks, the state government has already received ~50 proposals from potential PDPs. The mandate for PTMP's first component

– the RM6.3bil Penang Third Sea Crossing – was awarded to a Sino-Malaysian consortium, Zenith-BUCG. This parcel involves the construction of three road bypasses and a 6.5km undersea tunnel that connects the end of Gurney Drive to Bagan Ajam on the mainland. The project is currently undergoing feasibility studies. The focus will now gravitate towards the balance RM20bil of infrastructure works.

- PDP structure: Under the PTMP, the PDPs will be entrusted to execute the entire project; i.e. from financing until ownership (likely to be on a BOT basis). This is because the state government's fiscal revenue is limited to quit rents, land premium, and more importantly, sale of state land to PDP partners as payment-in-kind. Therefore, the supply and demand dynamics of the Penang property market is crucial to the successful funding of the PTMP. The property market must remain strong to entice the PDPs to accept the land swap arrangements.

- STP2 – a crucial source of funding: There have been talks of the state government embarking on new reclamation projects including the Penang Middle Bank (1,500 acres), located opposite IJM Land's highly successful The Light project. Nonetheless, we do not believe these projects will not take off anytime soon due to tough regulatory approvals by the Federal authorities. Hence, the primary source of land for the state government will be the pre-approved reclamation projects. The most significant parcels of prime land anchoring the PTMP are in Sri Tanjung Pinang 2 (STP2), where Eastern & Oriental (E&O) will soon be reclaiming some 760 acres of sea-fronting land to create an island opposite its existing upper-end township, STP1. E&O will also be reclaiming 131 acres along the Gurney Drive shorefront. In return, the state government will be given 110 acres of land, comprising 60 acres (gross land: 88 acres) of net land at STP2 and 50 acres in Gurney Drive. Earmarked to be given to the Zenith-BUCG consortium as part payment for the undersea tunnel, we estimate the combined value of the land to be about RM4.2bil. The state government also has a 21.2% stake in the STP2 and plays a pivotal role in funding the PTMP.

- We have raised our fair value for E&O to RM4.73/share, based on a 50% discount to our NAV of RM9.47/share. We have assumed a higher land value of RM500psf for STP2 compared to RM250psf given our expectations that E&O is moving closer to the divestment of a commercial land parcel at STP2 to an established global developer. Award of reclamation tender is expected in February and reclamation works will follow suit in March 2015.

- Net accretion to PDP estimated at RM5.7bil: In this report, we also built a scenario analysis to show potential value accretion for the PDP partners based on certain assumed parameters to arrive at the NPV for the various components of the PTMP. We estimate the net value to be RM5.7bil: (i) NPV of LRT/Bus Rapid Transit concessions – net of assumed state subsidies worth RM6bil (RM3.7bil); (ii) concession debt of RM6.6bil; (iii) prime land parcels as payment-in-kind (RM2bil); and (iv) NPV of other public transport upgrade projects (RM34mil).

- Gamuda at the forefront of PDP bids: Gamuda‟s perceived advantages are:- (i) its existing role as PDP for both the Klang Valley Lines 1 & 2; (ii) extensive tunneling expertise (e.g. Klang Valley MRT/Kaoshiung MRT, SMART Tunnel); and (iii) balance sheet strength. Assuming it successfully secures a 50% stake in the winning PDP consortium, we estimate Gamuda‟s NAV to potentially increase by 14% to RM6.94/share; it will rise further to RM7.10/share if we factor in another RM0.17/share upside from its recent appointment as PDP for the Klang Valley MRT 2.

- Other key beneficiaries: As Penang Sentral‟s status as the state‟s future transport hub complements the PTMP, MRCB stands to benefit as the state government‟s transport initiatives take shape. With the Tun Dr. Lim Chong Eu Expressway chosen as the starting point for two new major highways earmarked under the PTMP, the associated gains in future connectivity should add further premium to IJM‟s The Lights as it embarks on Phase 2 (GDV: RM6.5bil) of this flagship development next year. Likewise, the opening of Second Penang Bridge last March bodes well for the remaining phases of Mah Sing‟s Southbay City (GDV: ~RM2.7bil), located 1km away from the bridge at Batu Maung. The same positive rerating catalyst applies to Titijaya Land's Batu Maung project (targeted launch: 2H 2015) located next to Southbay.

Source: AmeSecurities