KUALA LUMPUR (July 2): Gamuda Bhd’s gearing level is expected to rise to a manageable 0.44 times or 44%, even though it has to pitch RM780 million into a RM1.3 billion bridging loan to the Penang state government to fund a portion of the Penang Transport Master Plan (PTMP), said analysts.

Yesterday, Gamuda announced that its 60%-owned subsidiary SRS Consortium Sdn Bhd was appointed as the project delivery partner (PDP) for the infrastructure project, which involves the delivery of different public transport components as well as the provision of three new reclamation sites for the Penang South Reclamation (PSR) project.

The bridging loan will be used to fund the creation and formation of Island A, one of the reclamation sites.

As it is, analysts considered Gamuda’s current gearing level of 0.35 times or 35% to be low.

In a note, TA Securities Research’s Ooi Beng Hooi said Gamuda stands to earn between RM960 million and RM1.1 billion from the project, based on PDP fees of 5% to 5.75% of the project cost, which the research house estimated to be RM32 billion (RM8 billion for the rail line, RM8 billion for the Pan Island Link [PIL] and RM16 billion for the PSR), as well as the size of its stake in SRS.

Given the sheer scope of the reclamation works, Gamuda could bring in a foreign contractor, likely from China.

Ooi said to soften the working capital blow of the project, the implementation of different components of the PTMP will be staggered, with the PSR and 23.5km rail line to be prioritised.

He maintained his “sell” call but raised his target price (TP) to RM3.46.

Affin Hwang Capital Research’s Loong Chee Wei forecast Gamuda’s estimated long-term PDP fee income to be RM1.6 billion to RM1.84 billion over the development period of 15 to 20 years.

“However, the speed of implementation of the project will depend on the ability of the state government to secure funds for the project and whether the federal government will assist in providing sovereign loan guarantees,” said Loong.

He added that it was understood that the sale of Island A, at a premium to its RM8 billion reclamation cost, in the long term will provide funding for the public transport component.

Meanwhile, SRS is expected to help Penang procure RM1.2 billion in financing to fund the RM2.5 billion cost of reclaiming the SMART Industrial Park component of Island A.

As such, completing the SMART park reclamation, which is expected to take four years, would allow the Penang state government to sell the land and raise funding for the remainder of Island A and partly finance the RM8 billion Bayan Lepas LRT project.

Loong maintained his “hold” rating and TP of RM3.75.

Kenanga Research’s Lum Joe Shen called the PDP fees a pleasant surprise as he had expected them to be 3% to 5%. However, he noted that these fees are likely only applied to works that SRS is overseeing, not executing.

Lum viewed that given the large funding obligations Gamuda has to co-develop the PTMP with the Penang government, Gamuda’s free cash flow from the toll concessions, which amount to RM350 million per annum, could be used for such funding.

“This could possibly jeopardise Gamuda’s traditional biannual six sen dividend (worth about RM300 million annually) moving forward,” he noted.

He kept his “outperform” rating and TP of RM4.10.

Meanwhile, Public Investment Bank Research’s Nurzulaikha Azali believed that it would not be a problem for Gamuda to raise its share of the bridging loan, given its low net gearing level of 0.35 times as of the third quarter ended April 30, 2020 (3QFY20) and its cash holdings of RM2.5 billion.

She added that Gamuda is also submitting tenders to construct Island A, and should it be the sole contractor for the job — which could contribute RM304 million in net profit to its bottom line over the next eight to 10 years — Gamuda could forfeit RM182.4 million (based on a 5% fee with its 60% stake in SRS) in PDP fees over the period.

Over 15 to 20 years, SRS could get RM1.6 billion to RM1.8 billion in PDP fees, based on the 5% to 5.75% fees.

She kept her “neutral” rating on Gamuda, but raised her TP to RM3.55.

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