Higher margins in construction segment seen for Gadang

Gadang Holdings Bhd (Oct 26, RM1.25)

Maintain buy with an unchanged target price of RM1.50: Gadang Holdings Bhd posted a top line of RM116.7 million and bottom line of RM18.3 million for its first quarter of financial year 2018 (1QFY18). Revenue and net profit dropped 28.7% quarter-on-quarter (q-o-q) and 38.8% q-o-q respectively in view of a stronger base in the last quarter (4QFY17).

However, net profit increased by 9.8% year-on-year (y-o-y), while revenue improved 11.6% y-o-y. The better performance on a y-o-y basis was mainly buoyed by construction segment which mitigated weak performance in the property segment.

Three-month FY18 (3MFY18) net profit of RM18.3 million meets our forecast but is below consensus forecast, accounting for 20% and 18.8% respectively.

Construction performance slid on a quarterly basis in view of a stronger base in 4QFY17. The construction segment posted RM76.8 million in revenue and RM16.8 million in profit before tax (PBT) in 1QFY18, while revenue and PBT decreased 14.7% q-o-q and 50.4% q-o-q respectively.

The unfavourable performance was due to contraction in PBT margin (-15.8 percentage points q-o-q to 21.8% from 37.6%).

Meanwhile, on a yearly basis, both revenue and PBT jumped by 82.8% y-o-y and 11.6% y-o-y respectively, given the progress in its existing projects (Rapid packages 301 and 402) and commencement of new projects (KVMRT-V206, TRX and Cyberjaya Hospital) coupled with recognition of some variation orders for completed projects.

Looking forward, we expect the construction segment to pick up in work recognition following the commencement of new projects.

Construction works are underpinned by an RM1.98 billion outstanding order book. The outstanding jobs will sustain the group’s revenue visibility close to 3.6 years or 3.6 times FY17 revenue.

We understand that the group is selectively bidding for new contracts involving government infrastructure and building projects with our target order book replenishment of RM750 million for FY18.

To date, the group has successfully achieved 60% target order book following the latest award of Cyberjaya Hospital.

The property segment remained lacklustre — it recorded RM33.8 million in revenue and RM8.5 million in PBT in 1QFY18, with revenue sliding 50.2% q-o-q and 39.8% y-o-y.

PBT dropped 40.3% q-o-q and 36.5% y-o-y. The lacklustre performance was due to the overall softening in the property market. Nevertheless, the group remains focused on affordable homes. — JF Apex Securities, Oct 26

This article first appeared in The Edge Financial Daily, on Oct 27, 2017.

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