News

Gamuda announced that the Housing Development Board of Singapore (HDBS) had accepted the tender submitted by Gamuda and its JV partners (Gamuda: 50%; Maxdin: 30%; Evia: 20%) to acquire a piece of leasehold land measuring approximately 3.0 acres at the tender price of SGD345.9m (RM967.0m).

The acquisition will be partly funded via internally generated funds and is expected to be completed in 3QCY15.

Comments

Neutral on this news as the land cost constitutes about 53% of potential GDV of SGD650.0m (RM1.82b). This proportion of land cost to GDV is far higher than the developers’ land cost proportion to GDV of about 10%-20%. Hence, we believe this project will likely to deliver much lower margins than that of Gamuda’s normalized property division’s margins (PBT) of about 22%. Furthermore, according to our property analyst, the property market in Singapore appears to be challenging, for the moment, due to multiple tightening measures.

While the land cost is viewed to be expensive, we reckon this is part of the process being Gamuda’s first Singaporean venture. As developers grow in size, our property analysts observed that business expansion to overseas is required for more sustainable growth. Furthermore, balance sheet wise, Gamuda has to fork out approximately about RM484.2m to finance the land acquisition and it will only increase the group’s net gearing to 0.48x from 0.40x as at 3Q15. It is still manageable since it remains below the 0.5- 0.6x net gearing threshold for developers.

Outlook

While the proposed acquisition of the land is part of their landbanking activities to boost earnings growth for the property division over the long-term, we remain concerned on the group’s near-medium-term earnings outlook due to: (i) shrinking construction orderbook and margins given that MRT1 is already at the tail-end, (ii) slowdown in local property sector, (iii) significant contribution from MRT2 will only kick in towards the end of FY16, and (iv) even if GAMUDA secures the PDP of RM27.0b Penang Transport Master Plan (PTPM), the earnings impact could only be seen in FY17.

Forecast

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

Rating

Maintain OUTPERFORM

Valuation

We revised our SoP-based Target Price to RM5.05 from RM5.29 after imputing the following: (i) updating our property RNAV (i.e. which now include the recently-acquired landbanks: Sabah, Melbourne and Singapore GDV), (ii) raise RNAV discount to 50% (from 40% previously), to be in line with our property RNAV discount average target of 50%. Our TP implies FY16E PER of 16.3x, in line with big cap fwd-PER range of 16-18x.

Risks to Our Call

Delays in KVMRT1 construction progress

Unexpected scrapping of KVMRT2 project

Another deadlock in SPLASH takeover deal

Higher-than-expected input costs,

Lower-than-expected property sales or/and margins.

Source: Kenanga Research - 26 Jun 2015