We initiate coverage on GDB Holdings with a BUY rating and a TP of RM1.37. Our call is premised on a stronger earnings cycle in FY21-22 underpinned by quadrupling of outstanding orderbook since FY18 to RM2.2bn, translating to sector high cover ratio of 6.8x (ex. MRCB). As such, we expect earnings to more than double in FY21 to RM61m. Building on its short but impressive execution track record, we see job flows continuing supported by sizable development projects undertaken by its repeat clientele. Our TP of RM1.37 is derived from pegging FY21 EPS to ex-cash P/E multiple of 13.0x which implies a 13% discount to our valuation for SunCon. We believe this is justified given GDB’s sector high orderbook cover and sector leading ROEs.

Company background. GDB operates as a main contractor/principal works contractor specialising in high rise residential, mixed and commercial developments. Since its inception in 2013, GDB has delivered a cumulative RM1.4bn worth of projects. The company was listed on the ACE market in 2018 and transferred to the main board in 2020.

Poised for positive earnings inflection. GDB has managed to grow its annual job wins from average RM396m (pre-listing) to RM736m (post-listing) culminating in RM1.25bn secured in FY20. Outstanding orderbook has quadrupled since FY18 to RM2.2bn, translating into a sector high cover ratio of 6.8x (ex. MRCB) to be executed over the next 3 years. Earnings growth seems anchored even in the unlikely case of zero replenishment of orderbook this year.

Early completion record bodes well for job prospects. Management prides themselves on an unblemished track record of early project completion leading to substantial savings on running costs as well as establishing a widening clientele base. Some its existing recurring clients like TRC and Hap Seng Land are in the midst of embarking on sizable development projects which augurs well for GDB’s future job prospects.

Enviable balance sheet. GDB possesses a debt free balance sheet and pairing this with healthy turnover ratios makes for a burgeoning cash pile. We expect GDB’s cash pile to grow in FY21-22 in tandem with stronger earnings forecast buoyed by normalising collection post-pandemic.

Forecast. We forecast FY20 earnings to come in at RM27.7m (-5% YoY), significantly better than the c.20-80% estimated decline for other construction players. GDB is on course to record a commendable 3% revenue growth in FY20 despite various operational halts (from Covid-19 headwinds) just by executing larger contracts it won in FY19. We expect FY21 and FY22 earnings to more than double to RM60.7m and RM62.4m in tandem with its enlarged orderbook.

Decent dividend yields. We expect GDB to stick to its dividend policy of paying min.30% of net earnings yearly. We are forecasting yields of 2.0%/3.0%/3.6% for FY20-22f. Yields for FY21-22f are boosted by our expectations of stronger earnings moving ahead.

Initiate with a BUY, TP: RM1.37. Our TP is based on FY21 EPS of 9.7sen pegged to an ex-cash PE multiple of 13.0x. Our target P/E multiple implies a 13% discount to our 15x ex-cash target P/E multiple for SunCon to account for its small cap discount. Our TP implies an upside of 39.1% with 3.0% dividend yield. We believe this is justified give GDB’s sector high orderbook cover as well as boasting near sector leading ROEs. Key risks include execution, rising material prices, political fluidity and Covid- 19 setbacks.

Source: Hong Leong Investment Bank Research - 25 Jan 2021