Gamuda Bhd
(Dec 2, RM5.05)
Maintain “neutral” with a target price (TP) of RM 4.90. Gamuda enlarged its exposure in Tanjong 12, Kuala Langat in Selangor after announcing that its wholly-owned subsidiary, Setara Hati Sdn Bhd had entered into a sale and purchase agreement with Bukit Melati Sdn Bhd for the acquisition of 104.1ha of leasehold land located within the area for RM392.2 million.

If the deal materialises, Gamuda will have 1,787 acres (723ha) of land in Tanjong 12, which should take more than 20 years to develop. The new land is expected to generate RM3 billion in gross development value (GDV) in our estimates, which will increase the group’s potential GDV to RM22 billion in the area.

Similar to the earlier land, the new land deal is also a leasehold agricultural land, and is located 2km away from its flagship development, Kota Kemuning, in Shah Alam, Selangor. Hence, the accessibility is good, with the land connected to highways such as the Shah Alam Expressway and Lebuhraya Kemuning-Shah Alam via the main spine road (Persiaran Anggerik Mokara) in Kota Kemuning which extends right through to Thangamalay estate.

We understand that upon completion of the connection road from Kota Kemuning to Bandar Saujana Putra, accessibility to the land will be further improved with connections to Expressway Lingkaran Tengah and the South Klang Valley Expressway.

Together with the previous two land deals, this land will be the group’s third major land deal and we believe it will be financed by internally generated funds and/or bank borrowings, which should not be a problem given the current low net gearing of 0.3 times.

If the deal goes through, Gamuda is expected to spend RM1.8 billion to expand its land bank in the recent two years, which is within its guidance of spending RM1 billion per annum for landbanking. The land price of RM392.2 million or RM35 per sq ft (psf) appears to be on the high side if compared with RM11.80 psf (or compared with Eco World Development Group Bhd’s land in Beranang, Ulu Langat [Kuala Lumpur-Putrajay] which was purchased at RM10.50 psf) it paid earlier for the 1,530 acres in the same locality.

However, if Gamuda can generate similar GDV/acre that is RM3 billion, the land cost of 13% looks palatable compared with other development projects whereby land cost can go as high as 20% nowadays. With this land deal, we expect Gamuda’s remaining GDV to increase to RM48 billion, with RM35 billion from Malaysia.

We maintain “neutral” and a TP of RM4.90, pegged on parity with our sum-of-parts valuation. In view of the anticipated infrastructure spending, job flows for Gamuda remain good but we opine the risk-reward is not attractive as yet. — Public Investment Bank, Dec 2

This article first appeared in The Edge Financial Daily, on December 3, 2014.