Results

• Results within our expectation but way below street estimates. Gadang reported a net profit of RM3.2m for its 2QFY21 result, which tumbled 70.4% yoy but rebounded strongly by 540.0% qoq. Overall, the Group chalked up RM3.7m for its 1HFY21 net earnings, slumping 85.6% yoy. The result is within our estimate by matching 48% of our full year forecast but significantly below consensus (11%).

Comment

• Construction and Property divisions weighed on yoy performance. Gadang recorded weaker yoy results for its 2QFY21 and 1HFY21 mainly dragged by its Construction (2QFY21 LBT: RM4.5m vs 2QFY20 PBT: RM9.3m; 1HFY21 LBT: RM3.4m vs 1HFY20 PBT: RM26.1m) and Property Development (2QFY21 PBT: -12.5%; 1HFY21 PBT: -13.9%). The lackluster Construction segment was mainly affected by lower construction progress, partly due to completion of a major project in the preceding year coupled with goodwill impairment incurred for one of its subsidiaries. Also, the Covid-19 pandemic has resulted in more stringent SOP which significantly impacted project progress, resulting in higher costs for current construction projects. Amid higher segmental top line recorded by its Property division (2QFY21 revenue: +35.5%; 1HFY21 revenue: +10.2%) on better sales, its segmental bottom line deteriorated mainly due to (2QFY21 PBT: -12.5%; 1HFY21 PBT: -13.9%) lower profit margin arising from the sales of affordable residential projects.

• Stronger qoq result underpinned by Property Development. The Group’s Property division was the key driver for the strong qoq rebound as segmental revenue and PBT increased 123.1% and 82.6% respectively on the back of improved sales and higher progress billings. Nevertheless, its PBT margin slid by 3.2ppts due to unfavourable product mix as mentioned above.

• Outstanding orderbook and unbilled sales to underpin future earnings visibility. As of 2QFY21, Gadang possesses RM717m of outstanding construction orderbook and property unbilled sales of RM124m which will underpin its earnings visibility for the next 2-3 years.

• Striving hard amid double whammy of its Construction business…… Gadang is working hard to buck the trend with prevailing challenging outlooks for both of its core segments, i.e. Construction and Property Development. Currently, the Group is bidding for RM3b of construction jobs, mainly consist of infrastructure and public amenities such as government hospitals. In view of slowdown in property sector, the Group is more inclined to look for government jobs rather than private building jobs on payment concerns. For its overseas venture, the Group has a tenderbook of SGD61m and is actively tendering for more piling jobs in Singapore. Overall, Gadang targets to bag RM300-500m worth of jobs for FY21. On the recent rulings on mandatory screening of Covid-19 for all foreign workers and improvement in worker accommodations, management guided that the cost impact is insignificant and the Group does not face any problem of foreign worker shortage.
   
• …….and Property Development segment. Meanwhile, for its property development segment, Gadang has achieved new sales of RM120m which constitutes about 52% of its FY21 sales target of RM230m. The Group continues to bank on residential projects such as Laman View, Cyberjaya; Putra Perdana, Puchong; and The Vyne, Sg Besi, all are strategically located in Klang Valley to boost its FY21 sales. The management highlighted that the buying sentiment is positive, however, loan approval is still rigid.
   
• Construction margin under pressure. We foresee the Group’s Construction division will have tough time ahead for its profit margin as operating landscape is getting more competitive with many players chasing after limited government projects in view of rising national debt and budget deficit. This is also compounded by the rising steel bar prices and compliance costs for Covid-19 SOP. Thus, we envisage Gadang to record low to mid-single digit PBT margin for its existing and new projects moving forward.

• Settlement of Capital City project in JB is still unresolved. To recap, due to poor market condition in JB property market, the project developer and Gadang (being the landowner) entered into a variation of the JV agreement in 2019 to revive this mixed property project which was launch few years ago. With the financing issue coming into fruition after settlement of land pledging and ownership transfer, Gadang is now entitled for RM250m development profit of which RM150m has been received by the Group. Thus, Gadang’s remaining entitlement is worth RM100m. Parties involved are still in negotiations for a commercially viable settlement scheme.

Earnings Outlook/Revision

• We fine-tune our FY21F & FY22F net earnings forecasts to RM16.4m (from RM7.7m) and RM 30.8m (from RM33.2m) respectively as we expect better 2HFY21F for Gadang on the back of improved margins for its Construction division as we believe worst is over for the segment.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM0.41. Our target price is pegged at PE multiple of 9.5x FY22F EPS amid gradual pick up of construction activities and awards in 2HCY2021.

Source: JF Apex Securities Research - 29 Jan 2021