Results

• Results below expectations. Gadang reported a net profit of RM0.5m for its 1QFY21 result as compared to a net profit of RM0.4m in its 4QFY20 and net profit of RM14.8m for its 1QFY20. Overall, the 1QFY21 net profit is below our earnings forecast.

• Sluggish QoQ earnings. The Group delivered a sluggish revenue of RM115.4m (flattish QoQ) and profit before tax (PBT) of RM2.1m (-68%) no thanks to lower recognition of construction progress as well as higher costs incurred pertaining to stringent Standard Operating Procedure (SOP). Meanwhile, we witnessed its EBIT down substantially to RM3.1m (-57%) from RM22.1m.

• Battered YoY performance. Revenue decreased substantially by -22% from RM147.6m mirroring the aforementioned reasons. To make matter worse, operating profit decreased significantly to RM3.1m (-86%) largely caused by high depreciation costs (+25%) and Administration expenses (+13%). Hence, the net profit tumbled to RM0.6m (-96%).

• Silver lining. On the other hand, the Utility and Property divisions were the main drivers to the Group which contributed RM5.9m and RM2m respectively to its bottom line, albeit both divisions were largely dragged down by the downturn of the Construction segment. We noticed that the concession business of water treatment has not been severely impacted by mounting COVID-19 cases in Indonesia. However, there will be some hindrance on the upcoming mini hydro power plant’s testing and commissioning as affected by the pandemic.

Comment

• Gloomy outlook. We opine that lingering political risk to continue weighing on the Construction sector as snap election and cabinet reshuffle are likely to be happened. The odds of the current government to accelerate local economy by launching mega infrastructure projects is becoming slim amid hefty c.56% debt to GDP ratio at the end of 2020. Moreover, we expect government to relocate its limited financial sources to the sectors that have been severely hit by COVID-19 such as tourism, retailing, airline, and O&G rather than construction sector. Also, we expect higher operating expenditure, channeling to healthcare spending such as PPE and vaccine procurement under current pandemic at the expense of development expenditure.

• Double whammy. Outlook for property sector remains challenging amid record low interest rate. Financial institutions remain tight in giving out loan to property buyers, concerning about unforeseeable economic outlook which could potentially hit borrowers’ repayment ability. The industry’s conversion rate from bookings to sales is hovering around 50% which is well below its peak of c.80% during the period between 2011 and 2014 according to our channel check.

Earnings Outlook/Revision

• We cut our FY21F & FY22F net earnings forecasts to RM7.7m (-83.7%) and RM33.2m (-45.0%) respectively after lowering our margin assumptions.

Valuation & Recommendation

• Downgrade to HOLD from BUY with a revised target price of RM0.41 (from RM0.59). Our revised target price is pegged at unchanged PE multiple of 9x FY22F EPS amid gradual pick up of construction activities and awards in 2HCY2021.

Source: JF Apex Securities Research - 22 Oct 2020