Results

• Gadang recorded top line of RM128.5m and bottom line of RM25.8m for its 3QFY17 in which revenue slid 13.1% qoq and 26.9% yoy while net profit down 7.6% qoq but inched up 2.7% yoy. The performance in 3QFY17 was mainly buoyed by better margins in construction and property segments despite lower revenue recorded.

• Above expectations- 9MFY17 revenue and net profit met 58% and 93% of our topline and bottom line forecast for FY17 respectively.

Comments

• Construction performance boosted by superior margin – Construction segment posted RM70.8m revenue and RM23.2m PBT in 3QFY17 with revenue down 3.1% qoq and 42.3% yoy. However, PBT surged 51.1% qoq and 5.4% yoy thanks to higher PBT margin which elevated 11.8 pts qoq and 14.9 pts yoy to 32.8%. Overall, 9MFY17 construction segment’s revenue slumped 38.1% yoy to RM186m with PBT only dropped 6.5% yoy to RM47m given PBT margin improved 8.5 pts yoy to 25.3%. We believe better margin achieved was mainly due to RAPID as KVMRT works close to completion.

• Construction works underpinned by RM1.6b outstanding order book - Construction order book stands at RM1.6b after taking account the newly clinched KVMRT2 package V2016 (RM952m). The outstanding book will sustain the group’s revenue visibility close to 2.4 years or 2.4 times of FY16 revenue. We understand that the group is selectively bidding for new contracts involving Government’s infrastructure and building projects with our target orderbook replenishment of RM400m for FY18.

• Property segment took a breather in 3QFY17 – Property segment recorded RM51.8m revenue and RM16.9m PBT in 3QFY17, declining 23.8% qoq and 11.8% qoq respectively in view of a high base in 2QFY17. Nevertheless, PBT margin jumped 4.4pts qoq and 4.5pts yoy to 32.6%. Cumulatively, 9MFY17 property segment revenue soared to RM176m with PBT jumped 38.8% yoy to RM49.5m.

• Property segment unbilled sales stood at RM164.7m - Unbilled sales for the property segment stands at RM164.7m which renders revenue visibility over 0.95 times of FY16 property segmental revenue. We understand that the group achieved new sales close to RM30m in 3QFY17, down 33% qoq against RM45m in 2QF17. Meanwhile, the group has clinched total new sales of RM111.5m during 9MFY17. Looking forward, we are positive that the group is able to sustain its encouraging new sales in view of the favourable product mix offerings such as the launch of new phases of Laman View, Cyberjaya, consisting 469 units of PRIMA apartments with GDV of RM157m and 194 double storey houses with GDV of RM173m (launched in Dec 16) which still enjoying resilient demand under current soft market. Besides, we also learnt that its residential development in Taman Putra Perdana, Puchong (GDV of RM160m) is targeted to be launched in end of this year.
• Utility segment hit a bump in 3Q performance – Utility segment contributed RM5.5m top line in 3QFY17, down 9.5% qoq and 0.9% yoy. Meanwhile, 3QFY17 PBT slid 48.8% qoq and 42.4% yoy. We believe it could be higher maintenance cost incurred during 3QFY17. As such, 9MFY17 PBT for utility segment improved 25.8% yoy to RM4.6m in view with better margin of 4.1pts under cost reduction initiatives by the group. Looking forward, we learnt there is a fresh negotiation for attractive tariff rates being undertaking by the group which may see growth during the financial year. Nonetheless, with the completion of construction for its 9-megawatt 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.

Earnings Outlook/Revision

• We lift our earnings forecast for FY17F by 13.5% following to the stronger-than-expected growth in property revenue and higher margin in construction segment.

Valuation/Recommendation

• Maintain BUY on Gadang with an unchanged target price of RM1.47. We derived our valuation by pegging at 13x FY18F PER. The valuation assigned is in line with its growth prospects of bagging more construction works in the future. The target PE is at the range of upcycle PE for small-and-mid cap contractors amid current booming infrastructure works.

• Looking forward, we are sanguine on Gadang’s earnings given the favourable property unbilled sales of RM 164.7m on top of its sizeable construction order book of RM1.6b. Meanwhile, we are optimistic with the group’s property development segment which focuses on affordable homes that suit the current market appetite as well as expansion plans for its power business which will boost its recurring income.

Source: JF Apex Securities Research - 20 Apr 2017