GDB’s 1QFY22 PATAMI of RM7.8m (-20.2% QoQ, -18.1% YoY) fell below our expectations at 17% of forecasts mainly due to margin squeeze offsetting higher billings. GDB’s orderbook stands at RM1.37bn translating to a healthy 3.2x cover on FY21 revenue. We think there could be award delays due to volatility of various costs. The weaker margin print could remain considering the persistent nature of the cost increase. Cut FY22-23 forecasts by -18%. Maintain HOLD with lower TP of RM0.41. Key risks include replenishment, execution, volatile material prices and worker shortage.

Below expectations. GDB reported 1QFY22 results with revenue of RM169.0m (16.7% QoQ, 52.1% YoY) and core PATAMI of RM7.8m (-20.2% QoQ, -18.1% YoY). The results fell below our expectations at 17.0% of full year forecasts. No adjustments due to one-offs were made for the quarter under review.

Deviations. Earnings shortfall was mainly due to margin squeeze as revenue came in inline at 22.8% of forecasts.

Dividends. No dividends were declared as they are normally declared in 2Q and 4Q.

QoQ. Core PATAMI fell by -20.2% bucking stronger revenue performance (+16.7%) as GP margin deteriorated by -2.5ppts. While construction activity normalised smoothly in 1QFY22, margins fell from higher materials and labour costs. In our view, labour costs have continued to increase due to shortages while various materials prices spiked from higher energy costs. Both trends are persistent over the past year.

YoY. Core PATAMI decreased by -18.1% despite stronger revenue growing by 52.1% as GP margin fell by -6.1ppts. The steep collapse in margins was brought by increase in materials, labour, preliminaries and SOP compliance costs. Mitigating the decline were recognition of additional profit from a completed project in the current quarter. We reckon there was a blanket downward recalibration of project margins done during the quarter given the persistently high material prices.

Outlook. GDB’s orderbook stands at RM1.37bn translating to a healthy 3.2x cover on FY21 revenue to be executed over the next 2-3 years. Management is gradually seeing more tender opportunities over the past few months. Nonetheless, we believe the sharp increase in various costs could lead to award delays from the private sector especially if prices remain volatile. As for margins, we expect the weaker print to remain considering the persistent nature of the cost increase and 1QFY22 was already mitigated by profit from completed project.

Forecast. Slash FY22-23 forecasts by -17.8% and -17.6. Introduce FY24 earnings forecast of RM47.0m.

Maintain HOLD, TP: RM0.41. Maintain HOLD with lower TP of RM0.41 (from RM0.48) post earnings cut. Our TP is based on FY22 EPS of 4.0 sen pegged to an ex-cash PE multiple of 8.0x plus net cash per share of 9 sen which we believe is fair for a small cap contractor. Key risks include replenishment, execution, rising material prices and worker shortage.

Source: Hong Leong Investment Bank Research - 19 May 2022