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Maintain NEUTRAL and MYR4.35 TP, 7% upside with c.3% FY24F (Jul) yield. The Environmental Impact Assessment (EIA) report for the Penang South Islands (PSI) project has been approved by the Department of Environment (DOE) under the Ministry of Natural Resources, Environment and Climate Change. The approval was for the construction of three islands, currently identified as A, B and C, adding that reclamation works will start on Island A, which will be turned into a Green Tech Park.
Back in Mar 2021, the Penang State Government (PSG) and SRS Consortium (SRS), a subsidiary of Gamuda, after months of negotiation, reached an agreement to undertake the development of Island A under a JV (70% SRS, 30% PSG). The JV is also the project developer (PD) responsible for securing necessary development approvals and carrying out the design, construction, and completion of PSI Island A’s infrastructure.
With the EIA for the PSI now being approved, we understand that the funding deficit may gradually increase to a peak of MYR4bn in the fourth year (after reclamation) and, thereafter, will be fully recouped upon receiving land sale collections. Land sales for Phase 1 Island A covers 1,200 acres, or c. 52% of Island A are regarded as the PD’s main revenue, and are estimated at MYR8-9bn. In addition, Gamuda Engineering is slated to be the turnkey contractor (TC), for the Phase 1 Island A reclamation works. Immediate orderbook value for the initial reclamation works was estimated at c.MYR5bn – based on guidance earlier in Mar 2021 and our latest checks with management. No official letter of award has yet to be received by Gamuda, at this juncture.
Our preliminary RNAV estimates from future land sales of Phase 1 Island A could raise our SOP-derived TP by MYR0.11 from MYR4.35 to MYR4.46, based on a discount rate of 8% and net margin assumption of 6%. Total net earnings from the land sale is MYR515m or MYR74m per year (over a 7-year period) which should begin to be recognised from FY26 onwards after reclamation is completed.
Earnings estimates. Despite the developments mentioned above, the PSG, through the project's development partner, is applying for Environmental Management Plan (EMP) approval from the Penang DoE. Reclamation works will only start after the EMP approval is obtained – expected to be during 3Q23. Henceforth, we make no changes to our earnings estimates at this juncture, pending further clarity on the said development. Moreover, the earliest revenue recognition from the land sales may only take place in FY26, beyond our forecast horizon.
As such, our SOP-derived MYR4.35 TP remains put, with a 2% ESG premium. With most positives priced in, on top of the Mass Rapid Transit 3 (MRT3) project and its overseas construction jobs, Gamuda looks fairly valued. It is trading at 12.5x FY24F (Jul) P/E – close to the KL Construction Index’s 5-year mean. Re-rating catalysts: Potential of securing the MRT3 systems package and further overseas expansions via Quick Turnaround Projects (QTP). Key risks include acceleration/delays in contract awards.
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