News  Yesterday, Gamuda announced that it has entered into a share sale agreement (SSA) with Salak Park Sdn Bhd to acquire the entire equity interest in Salak Land Development Sdn Bhd (Salak Land) which owns a piece of 1530 acres leasehold agricultural land for RM784.3m (RM11.77 psf).

 The land is located right next to Expressway Lingkaran Tengah (ELITE Highway) between Km 24 and Km 26.4. We gather that the land is near ELITE Highway’s Dengkil rest and service area (RSA).

 According to the announcement, the land is envisaged to be developed into “New Suburbia”, a contemporary comprehensive township.

Comments  Positive in the longer term as we believe: (i) the land price of RM11.77psf is relatively fair compared to the market prices of surrounding areas, which range between RM10–RM25 psf, (ii) the land acquisition is in line with its medium-long-term plan to boost the group’s landbank profile, and (iii) the land will likely be used for mass township development as affordable and landed residential developments are moving towards the outer radius of Klang Valley due to better affordability.

 Net gearing would only increase to 0.36x from 0.21x after this acquisition, which we think is manageable, after assuming a 50% debt-cash ratio.

 Great accessibility. Besides being located next to ELITE highway, the land is also accessible via KESAS highway, KLIA Interchange, Jalan Klang-Banting and Jalan B18.

 To replicate previous successful products. There is no guidance on GDV in the announcement but nonetheless, we believe development on the land will replicate its previous success township products such as Kota Kemuning, Bandar Botanic and Horizon Hills.

Outlook  While the proposed acquisition of the land is part of their landbanking activities to boost its earnings growth for the property division over the long-term, we remain upbeat on its construction division as the well-progressed KVMRT1 and upcoming KVMRT2 projects will continue to provide earnings visibility for the group over short-to-long-term.

Forecast  No change in our earnings estimates at this juncture pending completion of this exercise and more details on the launch of the project.

Rating Maintain OUTPERFORM

 We believe Gamuda will be the biggest beneficiary of more KVMRT2 news-flow and possible positive outcome of SPLASH’s negotiation with Selangor and federal governments in 2H14. Valuation-wise, it is currently trading at fwd-PER of 14.6x FY15E which is substantially cheaper than its 5-year average of 16-17x.

Valuation  Maintain our SOP-based Target Price of RM5.52, implying fwd-PER of 17x FY15 earnings, which is also in line with its 5-year average fwd-PER.

Risks to Our Call Delays in KVMRT1 construction progress,

 Unexpected scrapped in KVMRT2 project

 Another deadlock in SPLASH takeover deal

 Higher-than-expected input costs,

 Lower-than-expected property sales.

Source: Kenanga