Results

• Results within our expectation. Gadang recorded a net profit of RM3.7m for its 4QFY21 result, turnaround from a net loss of RM0.3m a year ago whilst surged 32.1% qoq. For full year FY21, the Group chalked up RM10.2m net profit, which slid 71.2% yoy on the back of tumbling revenue, - 14.6% yoy and PBT margin, -5.3ppts. Overall, the yearly result is within our estimate, meeting 98% of full year forecasts but way below consensus (63% of market estimate).

Comment

• Stronger quarterly performance. The better showing of quarterly result on yoy basis were underpinned by Construction and Utility divisions as respective segmental PBT doubled yoy thanks to higher margins (PBT margins for Construction and Utility inched up 0.7ppts and 8.1ppts respectively) amid lackluster performance of its Property Development segment (PBT: -1.5% yoy). The sluggish showing of Property Development was mainly due to impairment loss of RM8m on inventories despite top line surged 186.4% yoy. On the other hand, the better qoq result was bolstered by Property Development division as its segmental top line and bottom line surged 33.7% and 8.3% qoq respectively driven by higher sales achieved and work in-progress.

• Weaker full year result. Construction and Property Development (PBT: -99.7% and -29.6% yoy respectively) weighed on FY21 amid better performance posted by Utility division (+49.0% yoy). The gloomy Construction division was mainly due to the completion of major projects in the preceding year and lower profit margins for the ongoing projects. Moreover, the continuous impact of the Covid-19 pandemic has resulted in more stringent SOP, which suspended and deferred project progress, resulting in higher implementation costs for ongoing projects. Prolonged Movement Control Order (MCO) has also resulted in additional overhead costs due to extended time required to complete the projects. The additional COVID-19 related costs incurred, such as recurrent screening tests, workplace sanitisation, purchase of face masks and additional PPEs etc, have also contributed to the increase of project cost. For Property Development segment, the weaker performance was due to lower profit margins from the sale of affordable residential projects coupled with impairment loss on inventories.

• Proposed final dividend of 0.3 sen/share. The Group has declared a final dividend of 0.3 sen/share for FY21 (vs 1 sen/share in FY20) amid weaker full year result.

• Hit property sales target. As of the reporting date, Gadang has an outstanding construction orderbook of RM425m and property unbilled sales of RM162m which underpin its earnings visibility over the next 2 years. Gadang has successfully clinched RM231m new property sales which met its FY21 sales targets.

• Challenges remain. The Group remains cautious on its Construction outlook as orderbook replenishment prospects are expected to be challenging due to the reduction in government infrastructure spending. Despite the challenging economic condition and movement restrictions, the Group successfully launched the Maple Residence Phase 2, Cyberjaya, in June 2020 and received an impressive response from homeowners and investors. On its Utility segment, Gadang's hydropower plant in Sumatera, Indonesia has achieved above 90% physical project completion. However, the current pandemic situation in Indonesia has impacted the project’s progress, including the commissioning of the plant.

Earnings Outlook/Revision

• No change to our FY22F net earnings forecast of RM25.7m (+151.6% yoy) whilst introducing our FY23F net profit estimate of RM36.5m (+42.1% yoy).

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM0.41. Our target price is pegged at PE multiple of 11.5x 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. With the relaxation of containment measures as more construction activities are allowed to carried out nowadays coupled with announcement of 12th Malaysia Plan (12MP) and Budget 2022 in coming Sept and Oct 21, this shall benefit the sector with current favourable risk-reward.

Source: JF Apex Securities Research - 29 Jul 2021