• Profile: Gadang is involved in civil engineering and construction, property development, water supply, mechanical and electrical engineering services, and oil palm plantation.

• Beneficiary of local construction and infrastructure boom. Gadang has established itself as a niche player in large-scale earthworks contracts. On the back of an impressive track record in the MRT Line 1, it stands a good chance to play a role in MRT2, LRT3, High Speed Rail, and other infrastructure projects. At this juncture, consensus are expecting Gadang to secure a conservative RM300-500m annual orderbook replenishment assumption for the next two years, given its present tender book of more than RM3bn, with many other pipeline projects scheduled to be called for tender or awarded in the coming months.

• Utility and oil palm plantation divisions- Starting to bear fruits. Separately, its utilities unit continues to churn out stable earnings from four water supply concessions in Indonesia – more than offsetting minor losses at its plantations division. Looking forward, it is learnt a fresh negotiation for attractive tariff rates being undertaking by the group which may see growth in FY18/19. Meanwhile, with the completion of construction for its 9MW mini-hydro power concession PT Ikhwan by mid- 2019 and upon full commissioning, the Utility segmental earnings are expected to contribute significantly to the group.
   
• Despite incurring small losses in FY17 , Gadang’s management expects its 2,600 acres of planted oil palm with average maturity of 4-5 years to start contributing positive results from FY18. Overall, we are sanguine on Gadang’s earnings given the favourable property unbilled sales of RM164.7m (focusing on affordable homes that suit the current market appetite) on top of its sizeable construction order book of RM1.6bn, should provide good earnings visibility for FY18-19.
   
• Uptrend intact... We believe Gadang is at the tail end of its 2-month sideways consolidation and is ripe for an ascending triangle breakout. The stock hit a low of RM0.885 (9 Dec) from a high of RM1.35 (25 Oct) amid weaker-than-expected 1QFY17 results and profit taking activities post its share split/bonus issues/bonus warrants corporate exercises. After the 34% plunge, share prices managed to bottom up and trending above the major 100-d/200-d SMAs before closing at RM1.28 yesterday, thanks to the stable 2Q & 3QFY17 results and improving market sentiment towards small/mid cap stocks.
   
• Downside risk is limited as valuation is undemanding at 9.9x FY18 P/E (peers: 11.5x), supported by strong earnings visibility, sound balance sheet (netcash 8.5sen), commendable PBT margin of 24.9% in 9MFY17 despite challenging operating environment (9MFY16: 20.2%) as well as its potential to win more projects in the near future.
   
• …and poised for an ascending triangle breakout. A successful breakout above RM1.30 psychological barrier will spur share prices higher to retest 52-week high of RM1.35 and RM1.46 (123.6% FR) resistances before reaching our LT objective at RM1.53 (138.2% FR). Major supports are situated near RM1.23 (31 May low) and RM1.20 (100-d SMA). Cut loss at RM1.19.

Source: Hong Leong Investment Bank Research - 8 Jun 2017