Gadang earnings within estimates

Gadang Holdings Bhd (July 27, RM1.27)

Maintain buy with a revised target price (TP) of RM1.53: Gadang Holdings Bhd’s full financial year 2017 (FY17) profit after tax and minority interests (Patmi) of RM100.4 million was within our expectations, matching 103% of our estimate. Patmi only grew by 6.6% as it was dragged down by a higher effective tax rate (26.8% versus 23.7% in FY16). A dividend per share of three sen was declared, in line with our initial forecast.

Year-on-year, FY17 revenue fell 19.4%, mainly due to lower contribution from the construction division (-43%) as completed projects were handed over, but higher contribution from the property division (+42%) managed to cushion the shortfall in revenue.

FY17 profit before tax grew 12.8% to RM139.9 million, driven by both the construction and property divisions, with the former aided by variation orders from the handovers of major projects, and the latter helped by higher sales recognition.

Moving forward, earnings growth should continue to be anchored by the construction division, supported by an outstanding order book of RM1.5 billion (5.4 times FY17 construction revenue), after winning the RM952 million contract of mass rapid transit Line 2 in March 2017. Unbilled sales of RM136 million in the property division should also provide earnings visibility, having raked up new sales of RM96 million in FY17.

We make no changes to our FY18 and FY19 earnings forecasts. We introduce our FY20 earnings forecasts, with an earnings per share growth of 12%. Our sum-of-parts-based TP has been tweaked down to RM1.53, from RM1.55.

Gadang remains our preferred pick among small-cap construction companies, as we like its earnings visibility driven by its sizeable outstanding order book, as well as proven track record and reputation — which underpin its chances of winning more contracts to replenish its order book going forward.

Risks include inability to replenish its construction order book, a significant slowdown in the property market and a sharp hike in input costs. — RHB Research Institute, July 27

This article first appeared in The Edge Financial Daily, on July 28, 2017.

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