Gamuda, in 75:25 JV with Castleforge Partners Limited (Castleforge) via Venta Belgarum II Limited Partnership (VB II), purchased Winchester House London for GBP257m (equivalent to RM1.4bn), which is funded via borrowings shared among Gamuda (75%) and Castleforge (25%). Representing one of the largest commercial property deals in London year-to-date, Winchester House is a part of Gamuda Land’s quick turnaround strategy i.e. acquire, develop, market and monetise. Though Gamuda projected an IRR of more than 20%, we are neutral on this acquisition as it could only monetise the investment as long as 5 years. We understand that the acquisition could only start contributing to Gamuda’s earnings from FY26 onwards, assuming refurbishment is completed in 2 years’ time. Hence, we are leaving our FY23-25 earnings forecast unchanged pending deal completion in 3QFY23 and earnings recognition timeline. Our Outperform call is affirmed with an unchanged sum-of-the-parts TP of RM5.10.

• Deal structure. Gamuda and Castleforge, via VB II has come into an agreement with Wessex Winchester Limited Partnership to make staggered payment of which GBP20m (c. RM108m) is payable upon signing of SPA, with the remaining balance of GBP237 (c. RM1.3bn) to be funded by non-recourse debt and final payment within 24 months from the date of SPA. Based on Gamuda’s stake of 75% in the JV, the Group is required to fork out GBP15m (c. RM81.3m) upon signing of SPA on Mar 27 and take on GBP225m (c. RM1.2bn) debt subsequently. The Group intends to syndicate ~37% of its 75% stake to interested investors post completion of the acquisition by 3QFY23. If successful, the Group will be able to halve its debt level, pertaining to the acquisition, to GBP121.6m (c. RM658.7m) effectively reducing its stake to 38%.

• QTP strategy explained. Winchester House will undergo a 2-year refurbishment upon the expiry of its current lease to Deutsche Bank AG in April 2024. The plan entails:-
  a. The refurbishment of Winchester House from 8-storeys (317,000 sq ft) to 11 storeys, resulting in an additional ~200k sq ft of space to total approximately 500k sq ft;
  b. Upgrading the building's ESG credentials to Building Research Establishment Environmental Assessment Method (BREEAM) Outstanding, Net Zero Embodied & Operational, Well Core Platinum and NABERS UK 5-star rating; and
  c. Divestment within 5 years or prior, upon the full lease up of the building which may also occur on pre-lease arrangements prior to building completion.
  While VB II is expected to receive lease income from Deutsche Bank AG prior to its lease expiry in April 2024, the income is negligible as it will be used to offset interest payment for the debt incurred in this acquisition.

• Inexpensive price tag. The purchase price of GBP257m (c. RM1.4bn), which is approx. GBP809 psf represents a 33.6% discount to its current market value of GBP370m (c. RM2.0bn) or approx. GBP1,218.3 psf on average, based on recent comparable land transactions recorded within the vicinity. The acquisition would be funded entirely via borrowings. Based on Gamuda’s 75% equity stake in the JV, the Group will need to borrow GBP52m (RM281.7m) to fund the acquisition. As of 2QFY23, we estimated that Gamuda has a cash pile of RM3.0bn (post ERS Energy, Gamuda Gardens land and DTI acquisitions) and a net gearing of 0.17x.

• Winchester House, London. It is well connected with multiple tube and railway stations within 500m (i.e. 5 mins by foot), namely Liverpool Street Station, Moorgate Station and Bank Station. Despite its excellent location, the existing building is considered Grade B due to its age. Upon refurbishment, the asset will achieve prime-office status. Prime office rents refer to the top 10% of Grade A achieved rent which seen an average rental growth of 3.4% p.a over the past 10 years. In addition, the demand for Grade A office buildings with high ESG standards is substantially outpacing supply thus commands premium rental rates, which is further exacerbated with supply side restrictions due to policy requirements. All commercial buildings are mandated to have a minimum energy performance certificate (EPC) rating of C by 2027 and rating of B by 2030.

• Estimated IRR of 20%. Though Gamuda projected an IRR of more than 20%, we are neutral on this acquisition as it poses certain degree of investment risk i.e.: investment holding period, interest rate and foreign exchange risk, to the Group. Furthermore, the acquisition raised the net gearing ratio by 12.4 ppts, which also depletes the Group’s debt headroom by 17.7%. While the higher net gearing and lower debt headroom may not be too much of a concern, we also view this investment an opportunity to acquire undervalued sterling assets given the attractive real estate valuations amid UK’s political and economic turmoil. Nonetheless, the acquisition will not affect the Group’s bottomline in FY23-25 as earnings impact is expected to commence from FY26 onwards. Overall, including this QTP, Gamuda has acquired 7 QTPs with an accumulated GDV of RM7bn as-to-date.

Source: PublicInvest Research - 28 Mar 2023