What’s New

• Result deferred. Gadang Holdings Berhad’s (Gadang) 3QFY20 result is deferred to May from April due to movement control order (MCO). 3QFY20 result shows the period between December 2019 to February 2020 which is yet to reflect the impact from MCO.

• Approval has been granted to resume construction progress. Gadang has received approval from authorities for its site projects. Still, the Group hasn’t fully immuned from the impact from MCO amid sudden lockdown started on 18 March 2020.

Comment

• Difficulty in achieving operational efficiency. Although Gadang has resumed its site construction works after getting approval from authorities, we deem the construction progress would not run as smooth as pre-MCO for few standpoints. Firstly, construction work demands a comprehensive value chain to smoothen the whole process, any incomplete part of puzzle will slow down the construction progress. Secondly, stringent measures must be taken to prevent spreading of COVID-19 among its workers. Thus, Gadang must ensure its foreign labour are all tested according to the government’s standard operating procedures (SOP). Thirdly, higher cost will be incurred to maintain the hygienic standard such as sanitizing the foreign worker accommodation and project sites.

• Grimmer outlook persists amid headwinds. Amid the pandemic, prevailing political instability, sluggish consumer sentiment and faling national revenue pursuant to lower crude oil prices, the Group is expected to face huge challenges moving forward as new private and public projects take-off could be limited. Moreover, we believe the authorities will consistently pay attention to the construction sector on its SOP as it is highly labour-intensive especially with hiring large number of foreign workers. Also, recent undocumented immigrant raids also put on pressure to the sector. Spending for infrastructure is highly in doubt with current elevating fiscal deficit. We are of the opinion that government will spend prudently post COVID-19 to ensure country is not at the brink of sovereign rating downgrade. Essential spending is prioritized by consumers instead of pouring money into big-ticket items such as real estate. Plenty of businesses will also be shut down permanently and rising unemployment is expected to hit local private consumption. Hence, lower order book replenishment and sluggish property sales could pose the biggest risks to Gadang in near future. However, Gadang’s outstanding orderbook and unbilled sales as at February 2020 stand at RM877m and RM107.8m respectively which will keep them busy for at least next one and a half year.

Earnings Outlook/Revision

• We slash our FY20F and FY21F net earnings estimates substantially by 30% and 50.1% to RM38.1m and RM37m respectively in view of deteriorating property sales and higher cost incurred during construction progress.

Valuation & Recommendation

• We maintain HOLD call on Gadang with a lower target price of RM0.42 (from RM0.67) following our earnings downgrade. Our revised target price is now pegged at unchanged PE multiple of 8x FY21F EPS.

• We deem the heavy sell down on the stock in March which was triggered by collapse in oil prices and tense sentiment on COVID-19 is irrational. We believe current share price has factored in the impact of MCO as well as effects of COVID-19. However, possible weaker earnings coupled with slowdown in project awards could limit the upside of the stock.

Source: JF Apex Securities Research - 4 May 2020