Revival of mega infrastructure projects to benefit Gamuda

Gamuda workers get trained in tunnelling, - File pic

The announcement by Gamuda Bhd that it plans to start the first reclamation works for the ambitious Penang South Islands (PSI) project will see more jobs under the Penang transport master plan (PTMP) coming on stream.

The PSI project would see the creation of three islands -- named A, B and C -- with a total area of 4,200 acres at the southern tip of Penang.

Aside from PSI, other components in PTMP are the construction of transportation systems such as an elevated light rail transit (LRT), a bus rapid transit (BRT), tram, ferry and water taxis as well as the Pan Island link highway.

The whole PTMP project reportedly costs some RM46bil.

MIDF Research expects Gamuda’s longer-term prospects to look favourable, as jobs related to the PTMP over the next 10 years will fill up the latter’s orderbook.

“Moving forward, we do not discount the possibility of the group to win further contracts from other components of the PTMP such as the Pan Island Link, Bayan Lepas LRT and dual to three carriageway highways. There are also potential spill-over effects to its property development should Gamuda Land successfully bid for the reclaimed land sales in the foreseeable future. “Thus, we are of the view that this current arrangement for the project is of benefit to the group in the longer run, ” says MIDF Research in a report.

One of the planned South Island projectsOne of the planned South Island projects

Gamuda’s 60%-owned subsidiary SRS Consortium Sdn Bhd is the project delivery partner (PDP) for the PTMP. Gamuda’s partners in SRS are Loh Phoy Yen Holdings Sdn Bhd and Ideal Property Development Sdn Bhd, with each holding 20% in the consortium.

New structure brings more risk

On Thursday Gamuda said that SRS will undertake the development of the first phase of the PSI, dubbed “Island A”.

Gamuda said the Penang state government had accepted the terms of project development of Island A on March 25.

The project will be implemented through a joint venture (JV) with the Penang state government, and fully funded by the consortium through internally generated funds and bank borrowings.

According to Gamuda, a project development company will be formed on a JV basis between the entity nominated by the Penang state government (PSG nominee) and a special purpose vehicle to be set up by SRS (SRS PD), on the basis of 30:70 respectively.

“SRS PD will fund all the equity capital required and arrange for the necessary borrowings which may be required by the project developer to undertake and fulfil all its obligations under the project development, ” it said.

Island A will have a total size of 2,300 acres, which will take about 10 years to be reclaimed.

“We are now fully responsible for the whole Island A project. Under the PDP structure, the state government is responsible for the funding. However, the state wants to launch its economic recovery plans, as such we need a different funding plan to start the PSI project, ” says Gamuda group managing director Mohammed Rashdan Yusof to StarBizWeek.

He says Gamuda is in the midst of finalising the funding with banks to kickstart the project as early as next month.

UOB Kay Hian Research points out that under the new structure, Gamuda would be taking on more risk.

“The PSR of the Island A project has been converted into a private finance initiative (PFI) from PDP and will be fully funded by Gamuda.

“We believe investors’ reaction will be largely neutral towards this new development.

“With this change, Gamuda now will be taking more commercial risk compared with the previous structure, ” the research house says.

UOB adds that Gamuda’s decision to provide funding to the PSI project could limit its future options if better opportunities arise.

“Nevertheless, the project could be viable but will only be reflected in valuations when the JV achieves certain levels of development and sales milestones, ” it says.

Mohammed Rashdan said that the first phase of the Island A project would involve the reclamation of 1,200 acres of land spanning over five years with an estimated cost of RM6bil to RM7bil, including road and bridge development.

On a back of the envelope calculation, the reclamation cost works out at about RM95 per sq ft, which is lower than Eastern & Oriental Bhd’s (E&O) reclamation cost at Seri Tanjung Pinang Phase 2 (STP2), which was at RM110 psf.

Mohammed Rashdan says that the group has already received many enquiries ranging from property developers to semiconductor companies for the land on Island A.

“When the time comes, we will conduct it through an open tender, ” he says, without mentioning the selling price.

He says that the PSI project is not only focusing on residential but is a game-changer for Penang to attract both local and global companies to cater to the technology industry with the master plan and design concepts that include ESG or environmental, social and corporate governance principles.

Under the PSI project, a total of 700 acres of land has been allocated for a Green Tech Park, targeted at high-value E&E players on Island A that would complement the industrial ecosystem of Bayan Lepas.

“The Island A will be like Bayan Lepas 2.0, but it will be an ESG-centric development emphasising green and sustainable elements, ” Mohammed Rashdan said.

For the reclamation of the first phase of Island A, he expects the works would reflect an orderbook value of RM5bil, which would have an immediate impact on Gamuda’s bottomline.

According to UOB, Gamuda expects Phase 1 to generate land sales revenue of RM8bil to RM9bil over a period of up to seven years, with sales to commence in the fourth year after the reclamation starts.

Despite the thorough studies done by Gamuda before committing to the project, UOB believes that there are “still” execution risks and uncertainties over its ability to sell the land in the future, which could pose a significant downside risk to its financial position.

“The company’s decision to commit to this project is mainly to take advantage of the E&E supply chain decoupling from China, but there is no certainty that the trend will persist, ” it says.

Yet to secure environmental approval

The announcement of the PSI project failed to excite investors as the consortium has yet to receive approval from the environmental management plan (EMP).

Yesterday, shares in Gamuda declined by 3.5% to RM3.57 apiece.

Gamuda says the Environmental Impact Assessment (EIA) for the PSI project was approved by the Environmental Department (DoE) on 25 June 2019 with 72 conditions.

One of the conditions was preparing an EMP for approval before starting work to reclaim the islands.

“On January 6, the latest revision on the EMP was made and submitted to Penang DoE. “The project proponent is now waiting for Penang DoE’s update on the EMP’s status, ” Gamuda says.

Gamuda says the survey works and soil investigations would begin next Monday, which are only preliminary works that do not require an EMP approval.

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