Results

One-off gains lifted 2QFY22 result; achieved stronger adjusted PBT even excluding non-recurring item. Gadang Holdings Berhad (Gadang) posted a stronger reported net profit of RM36.5m for its 2QFY22 result, significantly higher than its 2QFY21 net profit of RM1.9m and 1QFY22 net earnings of RM3.7m. Overall, the 1HFY22 result is way above our and street estimates, exceeding full year net profit forecasts of RM25-26m. This is mainly due to nonrecurring profit totaling c.RM42m under its Property Development segment. Excluding the abovementioned nonrecurring property transaction and disposal gain of a development land, Gadang would have recorded 2QFY22 adjusted PBT of RM10m, +143.9% yoy and 66.7% qoq, and 1HFY22 adjusted PBT of RM16m, +220% yoy (which constitutes 40% of our full year PBT estimate).

Comment

Better yoy operational performance underpinned by all business segments. The Group’s Construction segment managed to return to the black during this quarter from a loss a year ago as achieved higher profit margins from certain on-going projects amid lower progress billings. For its Property Development, the Group recorded higher sales and working progress for its existing projects as segmental PBT in this quarter surged 21.1% yoy (excluding one-off gains). Similarly, the Utility division posted lower operating costs resulted in better quarterly PBT, +9.5% yoy. Likewise, the abovementioned reasons also helped to lift the Group’s overall 1H performance. However, Gadang’s Construction (PBT: -17.6% qoq) and Utility (PBT: -8.0% qoq) divisions weakened qoq amid better showings by its Property Development (PBT: +79.2% qoq excluding non-recurring gains).

More construction job wins and better property outlook. Gadang has successfully clinched a total of RM231.7m subcontractor works for Central Spine Road, Package 2 as of todate. The subcontract works include demolition, site clearance, earthwork, and an access bridge to Kuala Berang, Terengganu and will be completed by 1Q2QCY2024. Assuming a gross margin of 4%, the project is estimated to generate RM7.0m of net earnings to the Group with majority of earnings to be booked in FY23-24F. As of 2QFY22, Gadang has won a total of c.RM232m worth of jobs which is close to our yearly replenishment orderbook of RM300m whilst having an outstanding orderbook of RM485m. Meanwhile, 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 thanks to the ongoing Home Ownership Campaign coupled with rate reduction of the Real Property Gain Tax (RPGT). Gadang has clinched RM119m new sales as of 2QFY22, which account for 52% of our yearly property sales assumption. Currently, the Group has an unbilled sales of RM193m which underpin its earnings visibility over the next 2-3 years.

Foray into renewable energy, i.e. solar farm projects to further boost its recurring income. On its Utility segment, Gadang’s indirect 70%-owned subsidiary, Nusantara Suriamas Sdn Bhd (NSSB) has signed the power purchase agreement for Large Scale Solar (PPA) with Sabah Electricity Sdn Bhd (SESB). NSSB will design, construct, test, commission, own, operate and maintain a solar photovoltaic energy generating facility with the capacity of 5.9 Megawatt alternating current (MWac) proposed located in Tawau, Sabah for connection to SESB's medium voltage Distribution Network at PPU Sri Indah to generate and deliver solar photovoltaic energy to SESB. The PPA governs the obligations of NSSB and SESB to sell and purchase the energy generated by the facility for a period of 21 years from the commercial operation date which is expected on 30 June 2023. Management expects the project to contribute positively to the Group starting FY24F with our estimation of less than RM1.5m yearly net earnings to the Group’s bottom line.

Earnings Outlook/Revision

We lift our FY22F net earnings forecast to RM51.6m from previous RM25.7m after adding the abovementioned one-off gains. However, we maintain our net profit forecast of RM36.5m for FY23F.

Valuation & Recommendation

Maintain HOLD with an unchanged target price of RM0.41. Our target price is now pegged at PE multiple of 8x FY23F EPS which is slightly above its 5-yr mean PE of 7.5x and in line with current forward PE valuation of other small and mid-cap. construction counters.

Source: JF Apex Securities Research - 28 Jan 2022