In a five-year plan, GAMUDA will acquire the Winchester House London building in London, refurbish it into a top-rated ESG centric office building to be leased to MNCs, and divest it by end- 2027. We are positive on this project that could potentially fetch an attractive equity IRR of 27% and enhance GAMUDA’s sustainability agenda globally. We maintain our forecasts as the project’s contributions are beyond our forecast period. We also keep our TP of RM5.15 and OUTPERFORM call.

GAMUDA via a partnership with CastleForge (on a 75:25 equity stake basis) is acquiring Winchester House London, an office building currently housing Deutsche Bank’s London headquarters for GBP257m (or RM1,392m). Upon Deutsche Bank’s lease expiry in April 2024, GAMUDA plans to refurbish and upgrade Winchester House into a top-rated ESG-centric office building, secure a new lease for this upgraded asset and divest it by the fifth-year mark i.e. 2027. Note, post acquisition of Winchester House but prior to the refurbishment, GAMUDA intends to reduce its 75% stake below 50% (ideally 38%) to ensure the debts for this development will not be consolidated into its balance sheet.

The key takeaways from a special analyst briefing in conjunction with the announcement of the deal are as follows:

1. It sees an outsized opportunity to supply top-quality ESG office buildings to MNCs in London given the escalating demand but constrained supply no thanks to Brexit and Covid which had restricted new builds. It intends to achieve the highest ever ESG credentials attainable for Winchester House i.e. the “BREEAM Outstanding Rating” which has been obtained by only a handful of buildings in London. For context, BREEAM (Building Research Establishment Environmental Assessment Method) is the world’s leading sustainability assessment method recognised widely across Europe.

2. Prior to the refurbishment completion, it targets to secure at least 30% of pre-leases from MNCs and sees strong demand potential from HSBC, Macquarie and the London Stock Exchange which have leases expiring by between 2027 and 2028.

3. The total cost estimated for the entire development is GBP733m (include building acquisition, refurbishment, operating, leasing and financing costs) for which 35% will be equity funded while the remaining 65% will be debt funded.

4. By conservatively assuming rental of GBP92 psf on the newly refurbished net lettable area of 492.5k sf (current BREEAM offices rent for GBP90-100psf) and an exit cap rate of 4.5%, Winchester House London would fetch an exit value of GBP1.1b. For GAMUDA’s 38% eventual JV stake (after paring down its initial 75%), this would net a gain of c.GBP95m in which implies a 27% IRR on its initial equity of GBP97m over the 5-year horizon.

Overall, we view the quick turnaround plan for Winchester House positively as it maximises GAMUDA’s return of capital post its toll highways disposal and further enhances its sustainable agenda within the international space.

Should GAMUDA fail to pare down its stake below 50% to effectively classify Winchester House as a JV (versus a subsidiary), the debts obtained for the development would be consolidated and its net gearing would increase to 0.32x (from current 0.07x) which is still manageable against GAMUDA’s self-imposed net gearing ceiling cap of 0.70x.

Forecasts. As the entire Winchester House development will only see fruition in end-2027, we make no changes to our FY23F and FY24F numbers which are backed by unchanged construction replenishment of RM15.5b and RM12.0b, respectively.

We continue to like GAMUDA for: (i) it being the front-runner for the tunnelling job for MRT3, (ii) its job wins in in Australia and Singapore that speak eloquently for its competitiveness in the international market, (iii) its strong balance sheet after the disposal of its toll highways, (iv) its strong earnings visibility underpinned by a robust outstanding order book of RM20.5b, and (v) its efforts to expedite growth in the renewable energy space in line with global sustainability goals.

We maintain our SoP-TP of RM5.15 that value its construction business at 18x forward PER. There is a 5% premium accorded to its TP given a 4-star ESG rating as appraised by us (see Page 6). Maintain OUTPERFORM.

Risks to our call include: (i) governments cutting back on public infrastructure spending, (ii) delays in the roll-out of key public infrastructure projects in Malaysia such as MRT3, and (iii) delays in PFI project due to funding/environmental issues.

Source: Kenanga Research - 28 Mar 2023