Results

• Results significantly below expectations. Gadang posted a net profit of RM2.8m for its 3QFY21 result, which slumped 72.0% yoy and 12.5% qoq. Similarly, for 9MFY21, the Group chalked up RM6.5m net profit, tumbling 81.8% yoy on the back of decline in revenue, -24.2% yoy. The result is way below our estimate/consensus (meeting 40%/25% of full year forecasts) is mainly attributable to slower-than-expected recoveries for its Construction and Property businesses.

Comment

• Turnaround of Construction division in 3QFY21…… The Group’s Construction division managed to rake in segmental PBT of RM2.3m in 3QFY21 against LBT of RM4.5m in 2QFY21 albeit achieving lower segmental revenue, -13.4% qoq. We believe the margin improvement during this quarter was due to resumption of project progress and lower implementation works in relation to the impact of Covid-19 pandemic, i.e. stringent SOP on construction sites, screening costs as well as compliance costs on workers accommodation.

• …….But failed to lift qoq results. However, Gadang still recorded weaker qoq results as dragged by lower contribution from Property Development segment (revenue: -26.9% qoq, PBT: -28.6% qoq) coupled with higher effective tax rate (3QFY21: 49% vs 2QFY21: 43%).

• Weaker yoy performance. The lackluster yoy performance posted by Gadang during this quarter was weighed down by its Construction division (topline: -38.2% yoy, bottom line: -67.1% yoy) and Property division (topline: -29.5% yoy, bottom line: -58.6% yoy) amid strong showing by its Utility division (topline: +6.6% yoy, bottom line: +185.7% yoy). Likewise, the Group also recorded sluggish 9M result no thanks to lower progress billings, completion of major projects during 9MFY20 and goodwill impairment of a subsidiary company besides higher construction costs as impacted by the pandemic. Moreover, the lower margins from the sales of affordable residential projects that generated essential sales volume also aggravated the 9M performance.

• A silver lining. With the recent reaffirmation of large infrastructure projects such as Mass Rapid Transit (MRT3), the management is sanguine on the construction outlook moving forward. For property segment, the Group will launch more affordable homes at strategic choice locations. It plans to launch two new phases of development projects in 2HCY2021. As of 3QFY21, Gadang recorded RM624m outstanding construction orderbook and property unbilled sales of RM132m. We expect the Group’s outstanding oderbook to deteriorate further with no new contract win during 9MFY21 albeit targeting RM300m worth of jobs for this FY. Currently, the Group is bidding for RM2-3b of construction jobs, mainly consist of infrastructure and public amenities such as government hospitals. For its overseas venture, the Group is actively tendering for piling jobs in Singapore. On the other hand, Gadang has successfully clinched RM164m new property sales as of 3QFY21 and is on track to achieve its FY21 sales target of RM230m. Sales were mainly driven by residential projects such as Laman View, Cyberjaya; Putra Perdana, Puchong; and The Vyne, Sg Besi, all are strategically located in Klang Valley.

Earnings Outlook/Revision

• We revise down our FY21F & FY22F net earnings forecasts by 36.6% and 16.6% to RM10.4m and RM 25.7m respectively after reducing our margins for its Construction and Property segments as well as applying higher effective tax rates.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM0.41. Our target price is now pegged at PE multiple of 11.5x (from 9.5x) FY22F EPS amid gradual pick up of construction activities and awards in 2HCY2021. Our valuation of the stock is on the higher-end of the prevailing valuations of other mid cap construction companies. We reckon that market has priced in the slumbering FY21F earnings and any positive newsflow of sizeable contract win could spur the stock price.

Source: JF Apex Securities Research - 30 Apr 2021