INVESTMENT MERIT

- Emerging civil engineer giant. Gadang is gaining traction ever since it completed its first contract worth more than RM200m (LKSA highway) within the scheduled timeline. Since then, it has also managed to secure more sizeable projects. The biggest project was MRT1 (V2) (RM863m), which it bagged last year. Judging from the contracts secured by Gadang, which mostly required expertise in civil engineering, we reckon it could be fair to view Gadang as an emerging civil engineer giant which should soon be at par with the big names like Gamuda, IJM Corp and WCT. 

- Healthy orderbook of RM1.4b until 2016. Gadang has a strong orderbook of RM1.4b, which will support its  earnings visibility until 2016.

- Riding on robust construction. Gadang’s chances to clinch jobs at least RM500m every year is now relatively higher due to: i) the robust construction sector, 2) its strong track record and 3) its strong financials. Gadang, in fact, has  already tendered for a few infra works which among others, are the Phase 2 RAPID civil works (RM500m), TRX earthworks (RM1.0b), Kidex (RM2.5b) and the SUKE (RM600m) highway.

- Improving profitability. Admittedly, Gadang’s earnings was a bit bumpy for the past three years. However, its net profit has turned to positive territory in FY12 and FY13.  Going forward, we expect the momentum to continue taking  into account its RM1.4b healthy orderbook, which will last until 2016.

- Net cash position.  Interestingly, unlike other small cap contractors, Gadang has a strong balance sheet (net cash/share of 30 sen).

- Business diversification. While construction remains as its bread and butter business, we also like Gadang for its efforts to diversify its business into property, utilities and plantation..

- Trading BUY.  The group’s share price has risen significantly by 37% YTD and in the post-GE period to RM0.83. Nonetheless, it is still trading at a 28% discount to its small cap peers’ average PER of 8.0x for FY14 EPS. Benchmarking against this, the stock could be valued at RM1.15. TRADING BUY. 

TECHNICALS

- Resistance: RM0.89 (R1), RM1.00 (R2)

- Support: RM0.72 (S1), RM0.60 (S2)

- Comments:  After a 3-year downtrend, GADANG’s share price has finally shown signs of a major bullish trend reversal. The share price has also broken above the previous high/crucial RM0.72 resistance. We believe that GADANG could potentially make its way towards RM0.90 and RM1.00 next. Buy on weakness.

BUSINESS OVERVIEW

Incorporated as public limited company in Oct 1993, Gadang is primarily involved in construction with a wide variety of skills encompassing earthworks, infrastructure works, roads, bridges, buildings, residentials and M&E works. It is also involved in property development, utilities concession and oil palm plantation. Gadang is led by its Managing Director cum CEO, Tan Sri Dato’ Kok Onn. 

BUSINESS SEGMENTS

- Construction division.  Construction segment is the largest contributor to Gadang’s earnings, accounting for 77% of its total revenue in FY12.

- Property. The second major contributor to Gadang’s earnings is its property division, which accounted for 16% of its total revenue. It has a total landbank of approximately 90 acres with a total GDV of RM854.5m, which will be developed in the next 10-15 years.

- Utility. Gadang also has a utilities division (7% of its FY12 revenue) in its business where it owns five concessionaires (various stakes) in Indonesia. 

- Plantation. Gadang has also made its foray into the plantation sector when it signed an agreement with some Sabahan landowners to develop two parcels of land in 2009.

Source: Kenanga