Kenanga Research retains Outperform on Gamuda, unch TP RM4.10

  • Analyst Reports
  • Thursday, 02 Jul 2020

Penang Transport Master Plan: Penang Government website

KUALA LUMPUR: Kenanga Investment Bank Research is retaining its outperform on Gamuda Bhd with an unchanged target price of RM4.10 after its subsidiary was officially appointed to oversee the Penang Transport Master Plan (PTMP).

It said on Thursday, 60%-owned SRS Consortium is officially the project delivery partner (PDP) for PTMP after finally inking the master agreement with Penang State Government.

Key disclosures include: (i) SRS’s bridging loan provision of RM1.3b to Penang state and (ii) PDP fee of 5.0%–5.75%.SRS will be in charge of implementing six key areas namely: (i) reclamation of Island A measuring 2,300 acres, (ii) 23.5km LRT Bayan Lepas, (iii) 19.5km Pan Island Link Highway 1, (iv) 5km Pan Island link Highway 2A, (v) infrastructure on reclaimed Island A, and (vi) marketing and sales of the reclaimed Island A.“SRS will provide the state with RM1.3bil bridging loan to reclaim the first 800 acres of Island A.

This will cost Gamuda RM780mil (for 60% stake) and bring its net gearing up to 0.44 times (from current 0.35 times) which we still find manageable.

“Nonetheless, total funding required to fully reclaim 800 acres of Island A is RM2.5bil – whereby SRS and Penang State will have to explore other options for the RM1.2bil shortfall. We only expect repayment when the lands are up and monetised in four to five years’ time, ” it said.

Kenanga Research said the PDP fee of 5% to 5.75% is a pleasant surprise as it previously anticipating a lower range of 3% to 5%.That said, we note that the fee will likely only be applied for works where SRS will be overseeing – and not works that they are executing.

“With the large funding obligations to co-develop PTMP with Penang state, we opine that Gamuda’s future free cash flows from their toll concessions worth c.RM350mil per annum could be channelled for this purpose.

“This could possibly jeopardise Gamuda’s traditional biannual six sen dividend (worth c.RM300mil annually) moving forward.

“We continue to like Gamuda for its dominant position in the construction space in Malaysia which is bound to benefit from any pump priming initiatives. Risks to our call include: (i) no MRT3 project, (ii) wide resurgence of Covid-19, and (iii) a snap election, ” the research house said.

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