Results

• Gadang reported a net loss of RM3.4m for its 4QFY19 result as compared to a net profit of RM13.4m in its 3QFY19 and RM23.2m for its 4QFY18.

• Disappointing qoq earnings. The Group registered a lower PBT, down -85% qoq, bogged down by lower margin from construction segment and higher finance costs (i.e. expenses of bank borrowing cost on investment properties RM2.6m).

• Lackluster yoy performance. Again, the lower yoy PBT was mainly due to unfavorable performance in construction and property segments.

• Below expectations. The Group’s 12MFY19 was below our/consensus expectation, matching 68.7%/67% of full year net earnings forecast. The discouraging performance was mainly attributable to lower profit margin from construction segment.

Comments

• Construction – unfavorable qoq and yoy earnings. Construction segment’s PBT tumbled 99.3% qoq and 99.1% yoy to RM0.13m, no thanks to margin compression in view of higher labour costs and material costs coupled with variation order in 4QFY19.

• The Group has secured orderbook of RM124.5m year-to-date, which accounts for 41.5% of our RM300m target orderbook for FY19. As such, current orderbook stands at RM1.24b. We believe that the outstanding orderbook will sustain the Group’s construction revenue visibility close to 2.5 years or 2.5 times of FY19 construction revenue.

• Gadang eyes on securing more contracts from the revival of ECRL and Bandar Malaysia Projects. To recap, on 18 April 2019, Gadang entered into a pre-bid consortium agreement with DWL Resources Bhd to work with each other to bid for infrastructure projects. Based on the group’s track records and expertise, we believe the consortium stands high chance to secure contract from ECRL.

• Property – Better qoq despite lackluster yoy performance. Property segments’ revenue was up 61.7% qoq but down 18.8% yoy, while PBT surged by 93.4% qoq but tumbled 63.7% yoy. Weaker yoy performance was mainly due to lower margin and sales recorded from the Capital City project in Johor.

• Unbilled sales stand at RM119.34m, which render revenue visibility over 64% of FY19 property segment revenue. Looking forward, the Group will undertake more aggressive marketing activities to promote sales of its on-going and completed projects, such as Laman View, Cyberjaya; Elegan. Puchong and Bandar Puncak Sena, Kedah.

• Looking forward, we expect property market to remain weak. As such, we believe this will delay the new launches of property development projects for the next 1 to 2 years.

• Utilities division remains steady. Utilities segment’s revenue inched up 4.1% qoq and 5.2% yoy. On top of that, PBT/PBT margin improved 35.6%/8.4ppts qoq. Looking ahead, the construction of 9MW mini-hydro power plant is expected to be completed in FY20. As such, we envisage that utility sector will continue to perform better thereafter.

• Dividend declared. The Group declared first and final dividend of 1.2sen/share. This translates into a dividend yield of 1.3% based on current share price of RM0.91/share.

Earnings Outlook/Revision

• We slash our earnings forecasts for FY20F by 23% from RM70m to RM53.8m as we account for lower margin from construction and property segment. Meanwhile, we introduce our FY21F net earnings of RM58.1m with a yoy growth of 7.9%.

Valuation/Recommendation

• Maintain SELL with a lower target price of RM0.63 (RM0.74 previously) after revising downwards our earnings forecasts and pegged with a higher P/E of 8.5x FY20F EPS which is +1.5SD of its 3 year historical mean P/E as we believe the construction outlook is likely to improve with the revival of ECRL and Bandar Malaysia Projects. Nevertheless, we believe that the positive newsflow has been fully reflected in its share price.

Source: JF Apex Securities Research - 25 Jul 2019