Results

• Revenue performance mixed. Revenue for the quarter fell 5.2%  QoQ but is up 3.7% YoY dragged by the weak construction division (- 13.1% QoQ, -6.1% YoY) due to lower work progress achieved from newly awarded projects offset by the property division which grew healthily (+4.8% QoQ, +18.7% YoY) but the performance of the utility division remains stagnant (-2.9% QoQ, -7.8% YoY). 

• Core earnings turn red again. Gadang recorded a loss of Core PAT  at RM9.6m in 3Q23 (-226.0% QoQ, -241.3% YoY). This is mainly due to the overall higher expenses incurred and another round of higher taxes paid of 1034.3% compared to 90% in the last quarter after factoring out the foreign currency income obtained in that quarter. The high amount of tax is due to the non-recognition of deferred tax assets on unutilised tax losses of certain subsidiaries and certain expenses not deductible for tax purposes.

• Margins persist at the current level. The Group’s GP margins have been resilient (+2.1% QoQ, -3.8% YoY) while EBIT margins continue to deteriorate further (-0.7% QoQ, -7.5% YoY) due to an overall increase in all expenses.

• Orderbook and unbilled sales remain visible. The construction division currently has an existing order book of RM1.17b compared to the previous quarter’s RM1.20b which is still able to sustain the Group’s operations for the next two years. As for the property division, unbilled sales were reduced to RM193.7m from RM263.1m in the previous quarter.

• Solar Energy Facility to bear fruit soon. The construction of the  5.9MW solar photovoltaic energy generating facility located in Tawau,  Sabah is still in progress and is expected to contribute revenue during the second half of 2024. 

Earnings Outlook/Revision 

• Forecast lowered – We have lowered our revenue and earnings forecasts for FY23 by 1.7% and 91.6% as we forecast lower revenue recognition and anticipate another round of high incurred taxes paid,  our estimates for FY24 are also reduced by 10% and 21.2% respectively as we are more conservative on the Group’s ability escalate its work progress and to replenish its orderbook.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM0.265 (previously RM0.34). Our target price remains pegged at the PE multiple of 8x FY24F EPS which is below its 5-yr mean PE of 9.9x and is in line with our gloomy outlook of the sector.

Source: JF Apex Securities Research - 27 Apr 2023