New

To acquire 619 hectares (1,529.6 acres) of leasehold agricultural land (lease expiry on 6 Oct-2093) located along ELITE Highway between Km 24 and Km 26.4 (nearby Dengkil R&R) from Salak Park S/B for RM784.328m. The deal is expected to be completed by 4QCY14.

Highlights

Fair price… Based on channel checks, land cost in the area of Dengkil is between RM10-20/sq ft. Hence, we deem Gamuda’s acquisition cost of RM11.8/sq ft as fair even after factoring conversion premium and lease extension fees.

Long term investment… Management has been targeting for sizable landbank acquisition since last year and the latest deal does not come as a surprise to us. It is a huge tract of land and will boost its remaining landbank in Malaysia from 1,686 acres to 3,216 acres.

Assuming a net saleable plot ratio of 1x and ASP of RM150/sq ft. The potential GDV from this piece of land is RM10bn. Hence, a huge booster to its remaining GDV in Malaysia from RM13.7bn to RM23.7bn.

Development continuity… We believe that Gamuda will target “KL South” development, tapping into demand from Nilai, Sepang and Seremban area. It will provide development continuity in view of its maturing township development in Bandar Botanic, Jade Hills and Horizon Hills.

Balance sheet can take it… Based on 3QFY14’s balance sheet, Gamuda has RM1,336.9m cash/marketable securities and borrowings of RM2,485.2m. Hence, this acquisition will lift its net gearing to 36.1% from 21.4%.

Risks

Execution risk; Failure in securing new projects; Political and regulatory risk; Rising raw material prices; Unexpected downturn in the construction and property cycle; Sharp depreciation of the VND.

Forecasts

Unchanged pending conclusion of the deal.

Rating

HOLD 

We believe that the uncertainty revolving the Selangor water restructuring exercise will dampen Gamuda’s share price. Although positives will come from the next line of the KVMRT project, profit contribution from it will only sustain earnings instead of delivering earnings growth. Given that there is less than 10% total upside from our TP, we are maintaining our HOLD call on the company.

Valuation

Maintain TP of RM5.01 based on SOP valuation (see Figure #1).

Source: Hong Leong Investment Bank Research - 5 Aug 2014