Results

• Result below expectations. Gadang recorded a net profit of RM3.7m for its 1QFY22 result, turnaround from a net loss of RM0.5m a year ago whilst flat qoq. Overall, the 1Q result is below our and street estimates, meeting 14-15% of full year forecasts. This is due to lower-than-expected margin achieved for its Construction segment.

Comment

• Stronger yoy but flat qoq. The better yoy result was mainly lifted by all of its business segments. The Group’s Construction segment achieved higher working progress for its on-going projects (segmental topline: +15.8%; bottom line: +466.7%). For its Property Development, the Group recorded higher sales for its existing projects (segmental topline: +21.2%; bottom line: +60.0%). Meanwhile, the Utility division posted lower operating costs resulted in better performance (segmental topline: +9.5%; bottom line: +25.0%). Also, the lower fair value loss on quoted investment and forex loss aided the overall net earnings. On qoq comparison, the Group’s Property Development segment dragged down the overall performance no thanks to lower progress billings (segmental topline: -44.4%; bottom line: - 26.2%) amid better showings by its Construction and Utility divisions.

• Back in the groove with recent project win. We believe the Group could secure more projects in the near term following its recent job win of a government infrastructure project. To recap, Gadang has secured an RM100.3mn subcontract works for Central Spine Road (Package 2). The subcontract works include demolition, site clearance, earthwork, and an access bridge to Kuala Berang, Terengganu. The subcontracted work is for 30 months and shall be completed by 1Q2024. Assuming a gross margin of 4%, the project is estimated to generate RM3.0mn of net earnings with majority of earnings to be booked in FY23-24.

• Actively seeking construction jobs. Gadang will continue to actively participate in open biddings for projects to replenish its order book. The Group believes that with the revival of public-private partnership model, government could kick start more infrastructure projects in the near future. As of 1QFY22, Gadang has an outstanding orderbook of RM429m.

• Recovery in sight for Property Development. With the low-interest-rate environment and the incentives offered under the ongoing Home Ownership Campaign, Gadang is confident that demand for its wide array of mid-market products which are strategically located will continue to be well received by customers. Currently, the Group has an unbilled sales of RM188m which underpin its earnings visibility over the next 2-3 years.

• Eyeing for renewable energy. On its Utility segment, Gadang is keen to expand its footage in the renewable energy sector and will actively participate in upcoming largescale solar farm projects. We are excited on its prospects should the Group successfully venture into this area which could further boost its recurring income.

Earnings Outlook/Revision

• We keep our FY22F and FY23F net earnings forecasts of RM25.7m (+151.6% yoy growth) and RM36.5m (+42.1% yoy) respectively as we envisage its construction margin to improve further along with higher working progress backed by relaxation of containment measures and reopening of economy.

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 which is at +1SD above 5-yr mean PE and at the upper end of current forward PE valuation of other small and mid-cap. construction counters.

Source: JF Apex Securities Research - 28 Oct 2021