Results

• Gadang posted a top line of RM116.7m and bottom line of RM18.3m for its 1QFY18. Revenue and net profit dropped 28.7% qoq and 38.8% qoq respectively in view of a stronger base in the last quarter (4QFY17). However, net profit up 9.8% yoy with revenue improved 11.6% yoy. The better performance on a yoy basis was mainly buoyed by construction segment which mitigated weak performance in property segment.

• Broadly within expectations- 3MFY18 net profit of RM18.3m meets ours forecast but below consensus forecast, accounting for 20% and 18.8% respectively.

Comments

• Construction performance slid on a quarterly basis in view of a stronger base in 4QFY17 – Construction segment posted RM76.8m revenue and RM16.8m PBT in 1QFY18 with revenue and PBT decreased 14.7% qoq and 50.4% qoq respectively. The unfavorable performance was due to contract in PBT margin (-15.8 pts qoq to 21.8% from 37.6%). Meanwhile, on a yearly basis, both revenue and PBT up 82.8% yoy and 11.6% yoy respectively given the progress in its existing projects (RAPID package 301 and 402) and commencement of new projects (KVMRT-V206, TRX and Cyberjaya Hospital) coupled with recognition of some variation orders for completed projects. Looking forward, we expect construction segment to pick up in work recognition following the commencement of new projects.

• Construction works underpinned by RM1.98b outstanding order book - The outstanding jobs will sustain the group’s revenue visibility close to 3.6 years or 3.6 times of FY17 revenue. We understand that the group is selectively bidding for new contracts involving government infrastructure and building projects with our target orderbook replenishment of RM750m for FY18. As of to date, the group has successfully achieved 60% target orderbook following the latest award of Cyberjaya Hospital.

• Property segment remained lackluster – Property segment recorded RM33.8m revenue and RM8.5m PBT in 1QFY18, with revenue slid 50.2% qoq and 39.8% yoy. On the same note, PBT dropped 40.3% qoq and 36.5% yoy. The lackluster performance was fazed by the overall softening in property market. Nevertheless, the group remain focused on affordable homes in line with the current market demand. We understand that the group has launched Maple Residence (Cyberjaya Phase 2B) and PRIMA apartments (Cyberjaya Phase 2A) in June and August 2017 respectively with a total GDV of RM337m.
• Property segment’s unbilled sales stand at RM119.1m - Unbilled sales for the property segment stand at RM119.1m which render revenue visibility over 0.5 times of FY17 property segmental revenue. Looking forward, we are positive on its sales outlook in view of its favourable product mix offerings. 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’s revenue lifted by water tariff rate adjustment but PBT bogged down by higher operating cost – Utility segment registered RM6.2m top line in 1QFY18, inching up 2.7% qoq and 11.6% yoy. Meanwhile, PBT up 50.3% qoq but down 13.7% yoy in view of higher operating cost. Looking ahead, the group’s 9-megawatt mini-hydro power concession PT Ikhwan may start to contribute to the group in 4QFY18. Nevertheless, we only expect the concession to contribute significantly to the group by mid-2019, upon its commission and running in full capacity.

Earnings Outlook/Revision

• We retain our earnings forecasts for FY18 and FY19.

Valuation/Recommendation

• Maintain BUY on Gadang with an unchanged target price of RM1.50. We derive our valuation by subscribing 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 which will be underpinned by property unbilled sales of RM 119.1m on top of its sizeable construction order book of RM1.98b. In addition, we are positive with the group’s efforts in streamlining its construction operations and optimisation of its resources such as plants, labour, materials for better cost control in its projects handling, as we have witnessed an advancement in its construction’s PBT margin for the last 5 quarters. Meanwhile, we are cautiously optimistic on the group’s property development segment which focuses on affordable homes that suit the current market appetite as well as its expansion plans for power business which will further boost its recurring income.

Source: JF Apex Securities Research - 26 Oct 2017