Gadang’s order book seen surpassing RM1b mark

Gadang Holdings Bhd (July 22, RM2.48)

Maintain buy with an unchanged target price of RM2.59: Gadang Holdings Bhd posted top line of RM248.9 million and bottom line of RM30.5 million in the fourth quarter of financial year 2016 (4QFY16), in which revenue surged 41.5% quarter-on-quarter (q-o-q) and 46.6% year-on-year (y-o-y), while net profit jumped 21.5% q-o-q and 20.1% y-o-y. The vibrant performance was mainly attributed to better work recognition in the construction segment, and bolstered by a robust property segment.

The construction segment recorded a revenue of RM180.1 million and RM21.2 million of profit before tax (PBT) in 4QFY16, with revenue jumping 46.7% q-o-q and 37% y-o-y, but net profit inched down 3.7% q-o-q and 8.3% y-o-y. We believe major works contributing in 4QFY16 were Packages 0301 and 0402. These projects are procurement, construction and commissioning of civil and infrastructure works, which command lower margins in nature compared to earthworks in the Refinery and Petrochemical Integrated Development (Rapid). Overall, 12 months of FY16 (12MFY16) revenue increased 6.9% y-o-y and PBT jumped 45.2% y-o-y. The vigorous growth in PBT was underpinned by a better PBT margin (increasing 3.9 points to 14.9% in FY16), which we believe was attributed to Rapid earthwork jobs.

Its construction order book stood at RM615 million as of May 31, 2016, which will sustain its revenue visibility over 1.3 years or 1.3 times FY16 revenue. Management has spoken that the group has tendered over RM10 billion worth of jobs, namely Rapid, the Klang Valley Mass Rapid Transit Line 2 (KVMRT2), the Damansara–Shah Alam Elevated Expressway and the Sungai Besi-Ulu Kelang Elevated Expressway. We believe the group has a high chance to further replenish its order book, given its experience in KVMRT1 and Rapid jobs. If the group managed to secure a viaduct package of KVMRT2, its order book will surpass the RM1 billion mark.

The property segment recorded a revenue of RM63.3 million and RM17.4 million PBT in 4QFY16, soaring 33.6% q-o-q and 30.4% q-o-q respectively. The robust performance in 4QFY16 was underpinned by the JV Capital City project in Johor Baru, which commands high margins. Both its 12MFY16 revenue and 12MFY16 PBT achieved growth of 44.3% and 33.6% y-o-y respectively. Meanwhile, its PBT margin inched down 2.5 points to 30.8% for 12MFY16. We believe the better-than-expected performance in the property segment was attributed to a favourable product mix of affordable and landed houses that remained resilient in the market.

We learnt that the group is planning to launch a new phase of the K-Worker Housing project (Laman View) in Cyberjaya, with 194 units of double-storey houses. The estimated gross development value of this project is RM173 million. Looking forward, the property segment is underpinned by its unbilled sales of RM233 million as of May 31, with revenue visibility over 1.35 times FY16 revenue for the property segment.

We roll over our valuation by pegging at an unchanged price-earnings ratio (PER) of 8.4 times, with FY17 forecast earnings per share of 31 sen. We derived our target PER based on +0.5 standard deviation above its past five-year historical mean PER of 7.1 times. We continue to favour the group for its well-diversified business model and its ability to achieve growth in all divisions. Looking forward, we are sanguine about Gadang’s earnings given its favorable unbilled sales of RM233 million, coupled with a sizeable order book of RM615 million with high chances of lifting the order book with Rapid and KVMRT2 projects. — JF Apex Securities Bhd, July 22

This article first appeared in The Edge Financial Daily, on July 25, 2016. Subscribe to The Edge Financial Daily here.