GAMUDA’s 60%-owned SRS Consortium is officially the PDP for PTMP after finally inking the master agreement with Penang State. Key disclosures include: (i) SRS’s bridging loan provision of RM1.3b to Penang state and (ii) PDP fee of 5.0–5.75%. Overall, we are positive as PTMP works can now be progressively rolled out. Maintain OUTPERFORM with an unchanged SoP-derived TP of RM4.10.

Officially the Project Delivery Partner (PDP). Yesterday, Gamuda’s 60%-owned subsidiary SRS Consortium finally signed the Penang Master Transport Plan (PTMP) master agreement with Penang state – within management’s guidance of having it signed by 3QCY20.

SRS will be in charge of implementing 6 key areas namely: (i) reclamation of Island A measuring 2,300 acres, (ii) 23.5km LRT Bayan Lepas, (iii) 19.5km Pan Island Link Highway 1, (iv) 5km Pan Island link Highway 2A, (v) infrastructure on reclaimed Island A, and (vi) marketing and sales of the reclaimed Island A.

SRS will provide the state with RM1.3b bridging loan to reclaim the first 800 acres of Island A. This will cost Gamuda RM780m (for 60% stake) and bring its net gearing up to 0.44x (from current 0.35x) which we still find manageable. Nonetheless, total funding required to fully reclaim 800 acres of Island A is RM2.5b – whereby SRS and Penang State will have to explore other options for the RM1.2b shortfall. We only expect repayment when the lands are up and monetized in 4-5 years’ time.

PDP fee of 5.00–5.75% is a pleasant surprise as we were previously anticipating a lower range of 3 to 5%. That said, we note that the fee will likely only be applied for works where SRS will be overseeing – and not works that they are executing.

Cashflow from tolls likely to be channelled towards PTMP. With the large funding obligations to co-develop PTMP with Penang state, we opine that Gamuda’s future free cash flows from their toll concessions worth c.RM350m/annum could be channelled for this purpose. This could possibly jeopardise Gamuda’s traditional bi annual 6.0 sen dividend (worth c.RM300m annually) moving forward.

No change to earnings forecast. Maintain OUTPERFORM on unchanged TP of RM4.10. We continue to like GAMUDA for their dominant position in the construction space in Malaysia which is bound to benefit from any pump priming initiatives.

Risks to our call include: (i) no MRT3 project, (ii) wide resurgence of Covid-19, and (iii) a snap election

Source: Kenanga Research - 2 Jul 2020