GDB’s 1HFY22 PATAMI of RM11.m (-23.9% YoY) fell below our expectations at 30% of forecasts mainly due to deep margin squeeze offsetting higher billings. GDB’s orderbook stands at RM1.23bn translating to a 2.9x cover. We think there could be award delays due to volatility of various costs. We do not think that margins have bottomed. No mention was made regarding recent project rumours. Slash FY22/23/24 forecasts by -39.6%/-42.5%/-28.1% as we prudently slow burn rate assumptions and recalibrate margins downwards. Downgrade to SELL with lower TP of RM0.15 (based on 6x P/E multiple).

Below expectations. GDB reported 2QFY22 results with revenue of RM147.5m (-12.7% QoQ, +82.7% YoY) and core PATAMI of RM3.4m (-55.9% QoQ, -34.4% YoY). This brings 1HFY22 core PATAMI to RM11.2m declining by -23.9%. The results were significantly below expectations making up just 29.8% of our full year forecasts. The earnings shortfall was mainly due to margin squeeze further dragged by weak revenue ramp up.

Dividends. No dividends were declared (1HFY22: nil; 1HFY21: 0.7 sen).

QoQ. Core PATAMI fell by -55.9% as revenue exhibited a -12.7% decline mainly due to lower construction activities as certain projects near completion. GP margin was also lower by -3.0 ppts, reflecting an inflationary costs environment (materials & labour). We observe upward trending labour costs due to ongoing shortages.

YoY. Despite revenue increasing by 82.7% (due to low base resulting from lockdown SPLY), core PATAMI fell by -34.4% driven by the following: (i) higher materials and labour costs, (ii) higher prolongation costs and (iii) compliance costs. All of which resulted in GP margins falling by -5.7 ppts.

YTD. Core PATAMI declined by -23.9% due to factors as elaborated above.

8 Conlay. According to New Straits Times, KSK Land recently mentioned that the 8 Conlay project is on track and remains committed to delivering on its obligations. This comes after some news outlets (e.g. Nanyang, SinChew, etc.) reported that GDB has suspended works on the project, quoting a deleted article published previously by The Edge. In the meantime, GDB has not commented on the matter, perhaps due to client confidentiality reasons. Based on our estimation, the project forms ~75% of GDB’s unbilled orderbook with receivables plus contract assets of ~RM100m. As such, if the suspension is true, the impact to our forecast could be material. However, as GDB is debt free we think execution for its remaining 3 projects in advance stages should be unaffected.

Outlook. GDB’s orderbook stands at RM1.23bn translating to 2.9x cover on FY21 revenue to be executed over the next 2-3 years. We believe the sharp increase in various costs could lead to award delays from the private sector. Thus, we remain cautious on GDB’s ability to replenish.

Forecast. Slash FY22/23/24 forecasts by -39.6%/-42.5%/-28.1%. While the above matter hasn’t been confirmed or rebutted management, we are prudently slowing our recognition assumptions for the said project, reduced margin assumptions and dialling back on replenishment assumptions amidst a challenging tender environment.

Downgrade to SELL, TP: RM0.15. Downgrade to SELL (from HOLD) post earnings cut. Our TP is based on tagging FY22 EPS to a P/E multiple of 6.0x (from 8.0x) due to margin pressure and weak private sector fundamentals. We think a target P/E multiple of 6.0x is fair as it is in-line with other small cap construction stocks under coverage.

Source: Hong Leong Investment Bank Research - 24 Aug 2022