• Post Gamuda Berhad (Gamuda) analyst briefing, we are optimistic on  its acquisition of the Winchester House worth £257mn (RM1.39bn)  which is in line with its property development arm's quick turnaround  project (QTP)strategy, which aims to build a regional portfolio of real  estate projects with high internal rates of return within a relatively  short investment timeframe.

• Given the strong demand for top-class ESG buildings but limited  supply of such properties in the United Kingdom (UK), this provides Gamuda assurance of high potential tenancy, hence we maintain a  BUY call and SOP-derived TP of RM4.76 based on 60% discounted  RNAV.

Key takeaways from the analyst briefing:

• Limited Supply of Top-Rated ESG Office Space: There is a limited supply  of top-rated ESG office space in the district where Winchester House is  located. This makes the property an attractive investment for Gamuda,  as demand for such properties is likely to remain strong. ESG-focused  office buildings leasing activity from 2017 to 2022 are already renting  at £90-100 psf.

• Acquire at discounted price: The entry cost of £257mn (on deferred  payment) considered a good deal compared to similar buildings that  were recently sold for 6% to 33% more. With yield assumption of 4.5%,  the exit price for the property in 10 years’ time frame is projected to be  £1.1bn, which works out to about £2,200 psf.

• Quick-Turnaround-Project Strategy: This strategy is intended to  diversify the portfolio in which the plan involves using 40% of the  cashflow from township revenue to fund QTP investments. The  company has set a target of RM800mn yearly for 5 years and hence, a  total of RM4bn to fund QTP investments. In the last 18 months, Gamuda  has secured QTP deals worth RM7bn with range of investment from 3  to 6 years.

• Strong Pre-Lease Arrangements: Gamuda intends to dispose of this  investment by the 5th year or prior, after locking in strong pre-lease  arrangements by quality tenants. This approach minimizes the risk of  the property being vacated for an extended period, ensuring that it  generates income for the company.

• Our View. Given that the acquisition being financed on a non-recourse  basis, the outlook for the investment appears positive premised on: 1)  building is in a prime area, 2) a robust leasing strategy, 3) adoption of  conservative assumptions in the business strategy.

• Our call. No change to our FY23F-FY25F earnings forecast. Maintain a  BUY call on Gamuda with an unchanged SOP-derived TP of RM4.76 based on 60% of discounted RNAV. Our favorable view on the stock is  driven by healthy margin, strong cash position and steady dividend  yield.

Source: BIMB Securities Research - 28 Mar 2023