Gamuda’s land acquisition to be completed by October

Gamuda Bhd
(Aug 5, RM4.84)
Maintain buy with target price of RM5.28:
Gamuda has entered into a share sale agreement (SSA) with Salak Park Sdn Bhd for the acquisition of the latter’s entire stake in Salak Land Development Sdn Bhd for a total cash consideration of RM784.3 million. The value was arrived at on a willing buyer-willing seller basis. The acquisition will be funded by internal funds and borrowings.

We view this as another positive move by the group to improve its bottom line prospects after having increased its stake in Kesas Holdings Bhd, which is the toll concessionaire for the Shah Alam Expressway.

Salak Land, a wholly-owned subsidiary of Salak Park, is a private limited company incorporated on Aug 3, 1994. Its crown jewel is a piece of leasehold land measuring approximately 619ha, which is currently classified as agricultural land with the lease expiring on Oct 6, 2093. The land is located next to Expressway Lingkaran Tengah (Elite highway).

Assuming that Gamuda is only getting the land, the purchase consideration of RM784.3 million translates into RM512,600 per acre or RM11.77 per sq ft. We would consider this as fair if Gamuda manages to convert the land’s status from agriculture to mixed development.

Management is of the view that the proposed acquisition will enable Gamuda to further establish its position in property development and increase its investment property portfolio to provide long-term earnings growth.

Gamuda has not disclosed any estimated gross development value for the development of the land but we believe the proposed acquisition will contribute positively to Gamuda’s earnings in the long term with developments spread over 10 to 12 years. The proposed acquisition will also increase its undeveloped land bank to 3,846 acres (1,556ha). In addition, it is strategically accessible via the Kesas and Elite highways, Jalan Banting and the KLIA interchange. The connectivity is therefore very good.

The acquisition is expected to be completed by Oct 2, 2014, subject to the terms and conditions stipulated in the SSA. Currently, Gamuda has cash in hand of RM1.3 billion and a low net gearing of 0.21 times to finance the proposed acquisition. We maintain our financial year 2014 ended July 31 (FY14) and FY15 earnings forecasts at this juncture pending the completion of the deal.

Overall, we are positive on Gamuda due to its outstanding order book of more than RM2 billion which will provide earnings visibility for two years, potential order book replenishment from Southern Double Track in 2015 and KVMRT (Klang Valley mass rapid transit) Line 2 in 2016, and strong unbilled property sales of approximately RM1.8 billion. — MIDF Research, Aug 5

This article first appeared in The Edge Financial Daily, on August 6, 2014.


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