• Gamuda-led SRS Consortium has agreed to form a 70:30 joint venture (JV) with the Penang State Government (PSG) to develop Island A, part of the reclamation project under the Penang Transport Master Plan (PTMP).
• The change to a Project Developer (PD) role and Turnkey Contractor (TC) from a Project Development Partner (PDP) role previously means that SRS Consortium will bear all the financial risks of the Island A project.
• On the flip side, it will earn a higher construction profit margin compared to a PDP fee as the reclamation contractor as well as land sale gains in the long run. We are neutral on this development and retain our BUY call.

Higher Financial Risk as Property Developer

Only the reclamation and development of the 2,300-acre Penang South Islands (Island A) project will be implemented by the PD JV between Penang Infrastructure Corp, a PSG-owned company, and SRS Consortium. The other components of the PTMP project will remain under the PDP model. SRS Consortium has to raise the entire project financing for the Island A project as the PSG is absolved from all financing risks and obligations under the agreement. We gather that Gamuda may end up with the entire 70% stake in the PD JV if its other 2 partners with a 20% stake each in SRS Consortium decides not to inject their share of equity in the PD JV.

Low property development returns but will generate construction earnings

We gather that the estimated project cost is RM6-7bn to reclaim and build the common infrastructure for Island A Phase 1 (1,200 acres) over 6 years. The estimated land sales revenue is RM8-9bn over a period of up to 7 years with land sales to commence in the fourth year. We believe the project IRR is likely to be low as SRS Consortium will finance the entire project but only share 70% of PD JV’s earnings. The construction earnings from the RM4.0-4.5bn reclamation works to be awarded to Gamuda and share of TC project management fees will improve the returns on the project. We lift core EPS by 1-2% in FY22-23E to reflect the higher construction earnings from the Island A project compared to the previous PDP model.

Maintain BUY

We are neutral on the development from an earnings perspective. But the change in business model will raise Gamuda’s financial risk profile in undertaking the PTMP project. We remain positive on Gamuda’s good prospects to expand its order book with bids for Australian infrastructure and Klang Valley MRT Line 3 (MRT3) projects. We reiterate our BUY call on Gamuda with a 12-month RNAV-based TP of RM4.05.

Source: Affin Hwang Research - 26 Mar 2021