KUALA LUMPUR (June 26): Shares in Gamuda Bhd fell as much as 2.87% in the early trades as analysts expressed concerns over the property group's near mid-term earnings outlook and increase in net gearing due to its Singapore land purchase.
At 11.44am, the stock was traded RM4.75, down 12 sen or 2.46%, making it one of the top losers across the exchange today.
The counter saw some 2.94 million shares change hands. With the current price, it has a market capitalisation of RM11.5 billion.
Gamuda (fundamental: 1.8; valuation: 1.0) has earlier risen to a high of RM4.88 and dipped to a low of RM4.73.
The property group announced yesterday that it will acquire a parcel of leasehold land in Toa Payoh, Singapore, measuring 12,154.6 m2, for S$345.86 million (RM967.01 million) via its joint venture (JV) with Evia Real Estate (7) Pte Ltd and Maxdin Pte Ltd.
It said Gamuda-Evia-Maxdin JV had on June 23 obtained the Housing Development Board of Singapore's nod to acquire the tract. The current type of allowable development on the land is condominium or flats or, with written approval, a combination of flats and strata landed houses.
Gamuda expects the acquisition to be completed by the third quarter of 2015, and the purchase consideration to be satisfied by combination of cash and bank borrowings.
Despite the new venture, Kenanga Investment Bank Research said it remains concerned on Gamuda's near-medium-term earnings outlook due to its shrinking construction order book and margins given that Mass Rapid Transit Line 1 (MRT1) is already at the tail-end.
"Further, the slowdown in local property sector, significant contribution from MRT2 will only kick in towards the end of FY16.
"Even if Gamuda secures the project delivery partners (PDP) of RM27 billion Penang Transport Master Plan (PTMP), the earnings impact could only be seen in FY17," it added.
Commenting on the Singapore land acquisition, Kenanga IB Research said the land cost constitutes about 53% of potential gross development value (GDV) of S$650 million (RM1.82 billion), which is far higher than the developers' land cost proportion to GDV of about 10% to 20%.
"Hence, we believe this project will likely to deliver much lower margins than that of Gamuda's normalised property division's margins (profit before tax) of about 22%," it said in a note on Friday.
It also noted Gamuda has to fork out approximately RM484.2 million to finance the land acquisition and will only increase group's net gearing to 0.48 times from 0.40 times as at third quarter of financial year 2015 (3Q15).
"According to our property analyst, the property market in Singapore appeared to be challenging, for the moment, due to multiple tightening measures," it said.
Meanwhile, Hong Leong Investment Bank Research (HLIB) estimated that the acquisition would increase Gamuda's proforma net gearing to 44% from 36%.
HLIB projected that the new venture would enhance Gamuda's financial year 2016 (FY16) and financial year 2017 (FY17) earnings by RM28 million per annum or an incremental 4%.
The projection was based on assumptions, among others, which include 50% stake in GDV, the exchange rate of Singapore dollar to Malaysian ringgit of 1 to 2.8, profit before tax margin of 11% which is the mid-point of management's guided range at 10% to 12%.
"We were not surprised with the news as this was inline with management's guidance during its results briefing earlier this week.
"The management has indicated that its bid was only 1% higher than the 2nd highest bidder and the top 4 bidders had a price variance of less than 4% amongst each other, this provides us some reassurance that Gamuda did not overpay for the land," the firm said in a note to client today.
(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)