Gadang - Contract win is one of the powerful catalyst to move share price.

RHB Research (26 January 2017)

Gadang remains a BUY after it recorded a sharp earnings recovery in 2QFY17. This is further supported by its strong near-term earnings visibility, as well as its potential to win more projects in the near future.

The stock is currently trading at less than 7x forward P/E vs its peers’ low teens P/E. Hence, this is another strong reason to accumulate the stock. Our SOP-based TP is unchanged, at MYR1.40

Strong near-term earnings visibility. Gadang’s outstanding construction orderbook (MYR527m) as at 30 Nov 2016 – partly made up of variation order (VO) claims – and unbilled property sales (MYR187m) are set to provide earnings visibility over the next few quarters. Separately, its utilities unit continues to book stable earnings from its four water supply concessions in Indonesia, which has more than offset the minor loss recorded by its plantation unit. We are confident that Gadang would at least match the robust earnings that it booked in FY16 (May) in this current financial year.

While it has yet to win any substantial construction jobs for this financial year, scoring any major project in the near future would certainly be a much-needed sentiment booster for the stock. Meanwhile, its tenderbook stands at MYR3.1bn

BUY. We feel confident over Gadang’s near-term earnings visibility and longerterm growth prospects for all its businesses. It is trading at <7x forward P/E, which implies that this is a good opportunity to BUY.

Our TP of MYR1.40 also implies 9.2x 2017F P/E vs the small-cap construction sector’s 10-12x P/Es.

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RHB gave Gadang RM1.40 based on outstanding orderbook as at 30 November 2017

As at today (11 March 2017)

• 15 December 2016 for the development of a Large Scale Solar PV Plant of 5.9 MWa.c. in Kota Marudu, Sabah. (http://www.thestar.com.my/business/business-news/2017/01/13/gadang-jv-to-build-large-scale-solar-pv-plant-in-sabah/)

• 11 January 2017 entered into a joint venture agreement with Perikatan Progresif Sdn Bhd for the proposed development of a parcel of leasehold residential land measuring approximately 17.5 acres and located in Taman Putra Perdana, Puchong with GDV of RM160 million (http://www.thestar.com.my/business/business-news/2017/01/12/gadang-enters-into-jv-deal/).

•  18 January 2017, entered into a Development Rights Agreement with Kwasa Development (3) Sdn Bhd (KD3) for the Development.  KD3 is a wholly-owned subsidiary of Kwasa Land, which in turn is a wholly-owned subsidiary of the Employees Provident Fund. Seven hundred and eighty (780) residential units at an average of 37 units per acre are to be developed in R3-1, a freehold designated plot that would comprise a combination of high rise towers and villas.  Plot R3-1 is projected to have a gross development value (GDV) of RM700 million.  (http://www.theedgemarkets.com/my/article/gadang-build-rm700m-residential-project-within-kwasa-damansara)

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• 6 February 2017 , Gadang entered into a sale and purchase agreement with Nusvista Development Sdn Bhd for the acquisition a 2.66 acre piece of leasehold commercial land located at a strategic location within Damansara Perdana (http://www.thestar.com.my/business/business-news/2017/02/06/gadang-buys-land-in-pj-for-rm55pt7mil/)

• ​10 March 2017 Gadang Holdings Bhd has bagged a RM952.09 million contract from Mass Rapid Transit Corp Sdn Bhd Gadang (http://www.theedgemarkets.com/my/article/gadang-holdings-bags-rm952-mil-mrt2-job)

Conclusion:

Do we still believe Gadang remain under the small-cap construction sector’s 10-12x P/Es.?

The TP of RM1.40 ( implies 9.2x 2017F P/E) will be the same?

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