Due to funding constraints from Penang state, the Island A reclamation has been switched from a PDP to PD (Project developer) model where Gamuda will take on the role of both the developer and contractor of the reclamation works. We are net positive as works can now be expedited with Gamuda entitled to upside in the land prices. This new deal also adds RM5b to its order-book. Maintain earnings, OP call and TP of RM4.17.

A brand new structure for Island A reclamation. The SRS Consortium (Gamuda, Ideal, LPY) together with the Penang State has formed a 70:30 JV known as the Project Developer (PD) to jointly develop Island A of Penang South Reclamation (PSR) measuring 2,300 acres. This new structure will supersede the previous PDP (Project Delivery Partner) structure awarded back in July last year.

The difference between PD and PDP lies in the funding. Under the PDP model previously, SRS was supposed to fund RM1.3b while the Penang state would fork out RM1.2b to kick start the planned reclamation of the first 800 acres (Island A Phase 1). Bear in mind that in the PDP structure, SRS was purely acting as a contractor, has no equity in the reclaimed lands and the RM1.3b was meant to be loans to the Penang state which would be repaid upon land sales.

However, as the state has failed to come up with its RM1.2b funding, the model has been revamped. Under this new PD model, Gamuda will single-handedly fund all the reclamation and infra works of Island A (Phase 1) which is now 1,200ac (instead of 800ac). The tentative costs spread over six years would be RM6b-7b. (refer back for more)

Funding not an issue. Based on Gamuda’s internal cash projections, the peak cash outflow for this phase 1 reclamation is RM4b and would happen in year 4 before subsiding as land sales commences Despite the sizeable quantum, Gamuda’s free cash flows of c.RM6b in the next five years should cover the outlays without having to: (i) undergo equity cash calls, (ii) jeopardising dividend of 12sen/yr, and (iii) hamper working capital needs for new projects i.e. MRT3, Australia. Also, based on current net gearing of 0.29x, they have room to raise another RM3.5b debt at this juncture before hitting their cap of 0.7x.

Automatic winner. Being the funder of the project, Gamuda naturally

secures its rights to be the contractor for the reclamation and infra works worth RM5.0b (guides 10% PBT margins). The reclamation of Island A Phase 1 will begin in April 2021 (next month).

Our thoughts. We are net positive as we see the pros outweighing the cons in this deal. While it seems that land sales risks are now borne by Gamuda, we note that it would have been the same under the previous PDP structure anyway – in the manner where the Penang state would not pay SRS should there be a shortfall in sales (given the lack of funds). Hence, with this structure, we see Gamuda benefitting from; (i) upside in land prices and profits being an equity partner, (ii) faster project commencement, and (iii) smoother work progress where all the funding needs are clearly laid out without any concerns of state funding issues halfway into the job. The only negative (and unfair) element we see under this new structure would be the entire funding needs of the development (in total of RM6-7b) would be borne by Gamuda despite having two other partners in SRS Consortium.

No change to earnings forecast. In total, we have imputed RM10b worth of replenishments for FY21 and FY22 (RM5b/annum). Hence, this additional RM5b worth of contract falls right within our target. Maintain OUTPERFORM on unchanged SoP TP of RM4.17.

Source: Kenanga Research - 26 Mar 2021