GDB’s operations have by and large normalised and should be reflected in 4Q. Management is optimistic of strong billings cycle next year which we believe to be higher than our forecasts. Considering likely lingering effects of the pandemic we have maintained productivity assumptions. Tender book of RM1.7bn could see award decision by year end; we have baked in nil for FY21. Order book stands at RM1.8bn translating to a sizable 5.0x cover. Tweak FY21- 23 earnings by -0.2% to 9% post-model recalibration. Maintain BUY with unchanged TP of RM0.63 based on 10x P/E multiple ex-cash. We believe this is justified given GDB’s solid balance sheet and high ROE.

We Attended a Meeting With GDB Recently With the Following Key Takeaways:

Review of 1H21. GDB’s 1HFY21 core earnings of RM14.8m (53% YoY) were within our expectations at 48% of FY21 estimates. While revenue missed, margins came in better than expected with net margins surprising on the upside by 1.7%. We had earlier slashed margin assumptions down on account of surge in various materials costs and additional SOP-compliance costs. Management’s estimated impact of materials costs pressure is slightly less than 1% at the net margin level, which we may have over accounted for.

Ramping up. The company has ramped up to 100% operating rate since early Sep- 21 for its Peninsular projects which make up 94% of its outstanding order book. Its HCKK project in Sabah remains at 60% operating capacity plagued by the state’s relatively slow vaccination progress. For comparison, Sabah’s latest vaccination rate stands at 39.2% vs national average of 57.1% (total population). Nonetheless, at 6% of order book, by and large GDB’s operations would have normalised by 4Q21. GDB is expecting to register a top-line surge in 2022 as its sizable projects namely, 8 Conlay and Park Regent move into stronger phases of the billing cycle. Should this materialise smoothly we reckon there’s upside to our FY22 forecast. Nonetheless, given the likely intermittent nature of operations moving into the endemic phase, we make no changes to our estimates. To our understanding, virus spread is still likely even among the vaccinated.

Order book. GDB’s order book stands at RM1.8bn translating to a sizable 5.0x cover on FY20 revenue to be executed over the next 2-3 years. EOTs have been obtained for all projects which are provided for under a contractual clause. Management is confident that with the revised timeline, projects will be completed on schedule.

Replenishment. Tender book stands at RM1.7bn broken down into: (i) commercial & hotel - 38%, (ii) residential - 31%, (iii) office - 19% and (iv) mixed - 12%. Approximately 2/3 of outstanding tenders were called last year with awards delayed due to pandemic exacerbated by escalating costs. We learnt that fresh tenders for these were resubmitted in August-21 incorporating latest construction costs. Meanwhile, the remaining 1/3 is for a rather sizable project (existing client) with award decision expected in Oct-21. Our forecasts are based on nil replenishment for FY21 given the repeated job delays that has plagued the sector this year.

Forecast. Tweak FY21/22/23 earnings by -0.2%/+3.3%/+9.0% post-adjusting cost assumptions.

Maintain BUY, TP: RM0.63. Maintain BUY with unchanged TP of RM0.63 post earnings adjustment. Our TP is based on FY22 EPS of 5.4 sen pegged to an ex-cash PE multiple of 10.0x plus net cash per share of 10 sen. We believe this is justified given GDB’s solid balance sheet as well as high ROE. Key risks include execution, rising material prices and Covid-19 setbacks.

Source: Hong Leong Investment Bank Research - 22 Sept 2021