PTMP a financially taxing job for Gamuda

KUALA LUMPUR (July 2): Gamuda Bhd said yesterday that the Penang State Government has appointed it to be the project delivery partner (PDP) for the Penang Transport Master Plan (PTMP).

For that, the construction giant will be paid a PDP fee of 5%-5.75% based on the project cost. However, investment analysts are not sure its scope of jobs will be covered by the PDP fee.

In a bourse filing, Gamuda said its 60%-owned unit SRS Consortium Sdn Bhd had inked a master agreement with the State Government on its appointment as the PDP for the infrastructure project.

Under the agreement, SRS will deliver various public transport components, including highways. In addition, it will provide new reclamation sites comprising Islands A, B and C of the Penang South Reclamation project.

Gamuda will provide a funding plan that includes an RM1.3 billion bridging loan to the Penang Government for the reclamation of Island A.

Being the PDP, Gamuda will have to have a strong balance sheet to kick-start the massive PTMP that has been dragged for years as it is responsible for funding for the project. Furthermore, as Gamuda is given the right to reclaim land as part of its returns, instead of cash settlement, it will take time to realise the gains.

A fund manager said funding for the project will be Gamuda’s biggest challenge. He noted that the divestment of the four toll highways in which Gamuda has a majority stake — which would have strengthened its financials — is likely to have fallen through.

Based on Gamuda’s effective interest in the toll concessionaires, its share of the sale proceeds was estimated to be RM2.36 billion. The proceeds would have been handy for Gamuda to kick start the PTMP.

On top of that, having to sell land to realise gains in the current weak economic environment is not an easy feat.

“Without support from the Federal Government, Gamuda will have to work harder to ensure the project is ‘self-financing’ as the State Government has little resources except for land and land reclamation rights,” the fund manager commented.

For the RM1.3 billion bridging loan, Gamuda’s 60% stake in SRS will have to chip in RM780 million. Analysts believe the construction giant will have to flex its financial muscles to obtain bank borrowings.

Consequently, Gamuda is likely to gear up to fund the massive infrastructure project.

Rakuten Trade Research vice president Vincent Lau said the termination of the sale of the four highways would not pose an insurmountable barrier for Gamuda to undertake the project in Penang. “It will be more taxing, but it can be done,” he said.

Lau, however, noted that the gestation period for the project could be long, which means it will take some time until the project starts to deliver a meaningful income contribution to the group. So, Gamuda will still have to bid for projects elsewhere to sustain its income flow in the absence of contribution from PTMP.

UOB Kay Hian analyst Farhan Ridzwan, meanwhile, anticipates that earnings from PTMP to start flowing in from the financial year ending July 31, 2022 (FY22), on the assumption of no major delays.

He also expects the margins to be lower at the initial stage of the construction project, compared with more advanced stages.

Affin Hwang Capital Research’s senior associate director Loong Chee Wei, on the other hand, holds a more optimistic view.

Although Gamuda is not able to sell the toll roads, Loong said proceeds the group gained from the divestment of its stake in Syarikat Pengeluar Air Sungai Selangor (Splash) will help.

“As it stands the group’s net gearing is 35%, so it can actually gear up in order to raise more funds,” Loong said.

He also noted that the project is a long-term one, and that Gamuda will recognise PDP fee income on a progress billing basis based on the completion stage of the project.

And given that Island A will be industrial land, Loong expects the land reclaimed would be attractive, especially to electrical and electronics (E&E) companies. Hence, he foresees that the reclaimed land will be a long-term earnings provider for Gamuda.

Source: TheEdgeMarkets