• Still NEUTRAL and MYR4.35 TP (SOP), 4% upside with c.3% yield. Gamuda and Castleforge Partners (Castleforge) via Venta Belgarum II (75%:25% stakes) signed a sales & purchase agreement (SPA) to acquire 100% of Winchester House (WH), London, for GBP257m (MYR1.4bn). This buy is part of its property arm’s quick turnaround projects initiatives.

• The GBP257m acquisition price represents a c.20% discount to the original price paid by the vendor. Gamuda’s initial outlay for the 75% stake in WH is GBP15m (MYR81m) – the remaining GBP5m (MYR27m) is to be borne by private equity firm Castleforge upon the SPA’s signing. Planning approvals are likely to be obtained a year from now. The remaining GBP149m or 58% of the entry price will then be fully debt-funded by Cheyne Capital Management (expected completion: May) at a c.6% floating rate.

• Most importantly, Deustche Bank’s (DB) departure from WH (the only tenant) in Apr 2024 should enable smoother refurbishment works with better ESG features vs having multiple tenants with varying lease expirations. As refurbishment works will commence after DB vacates WH for 2.5 years – Gamuda also aims to pare down its stake in WH to 38% from 75% in 4QCY24 – which also applies to the overall GBP476m for development, financing, leasing, and other operating costs – by bringing in new co- investors after planning approval is obtained. Later in Feb/Mar 2025, 34% of the acquisition price will be settled by Gamuda and Castleforge based on their portions (see Figure 1 for the overall deal timeline).

• The baseline strategy is to pre-lease c.30% of WH’s office spaces before practical completion, which is expected in 4QCY26. The balance will be leased out subsequently after full completion of the refurbishment to capitalise on uplift in rents (3% CAGR for the rental rate). Upon Gamuda’s targeted exit from WH at end 2027, the overall exit price for WH is projected to be at GBP1.1bn. This is based on a 4.5% capitalisation rate vs the GBP257m acquisition price, ie an estimated IRR of c.27%.

• Our thoughts. In risk terms, the chances of finding a tenant is high due to the huge undersupply of top ESG-rated office buildings in London – with major multinational firms already on the lookout. The projected 27% IRR from exiting WH may help ease the overall return compressions from Gamuda’s current townships, ie Gamuda Cove and Gamuda Gardens, which have IRRs below 12% vs IRRs of >20% in past developments. Simultaneously, we remain wary of any potential spillover impacts from Vietnam’s lacklustre property market.

• No changes to earnings estimates pending deal completion. Hence, our SOP-derived MYR4.35 TP is kept with a 2% ESG premium. With most positives priced-in, vis-à-vis 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: Penang South Island’s green light and potential of securing the MRT3 systems package. Upside/downside risks include acceleration/delays in contract awards.

Source: RHB Research - 28 Mar 2023