-  9M14 results to be announced today, expect better performance QoQ and YoY. Gadang will be announcing its 9M14 results today. Excluding gains from land sale in Penang of about RM11m last year, we expect 9M14 net profit to surge by as high as 200% driven by: (i) outstanding orderbook of more than RM1.0b and (ii) unbilled property sales of about RM320m. QoQ, we expect 3Q14 profit to slightly improve by 5-10%.

- Amongst the early beneficiaries of RAPID. We believe that Gadang will likely be amongst the early beneficiaries of recently-approved high profile oil & gas project, the USD27b RAPID in Pengerang, Johor. Recall, we have mentioned in our Construction 2Q14 Strategy Report that RAPID will likely benefit contractors that already have presence in the project such as Gadang which now undertaking Phase 1 of the project’s earthworks. We gather the Phase 2 of the earthworks will amount up to RM350m - RM500m. If Gadang wins Phase 2, we expect the margins will be much better than that of Phase 1 as it can save on the mobility costs as it has already deployed all its equipments and machineries in the existing area. Assuming Phase 2 of RAPID earthworks will be announced this year, with a pre-tax margin of 10%, we estimate the project will add another RM12.5m per year to Gadang’s bottomline until FY17.

- Earnings visibility intact with outstanding orderbook of RM1.1b. Current ongoing projects include: (i) MRT1 V2 package (RM724.7m), Shah Alam hospital (RM191.1m), and site preparation works for RAPID (Phase 1) (RM189.1m). All of these jobs are running on schedule and more importantly provide Gadang with earnings visibility for the next 2-3 years.

- Tenderbook of RM6.0b. Besides RAPID Phase 2 which it is highly likely to secure in the near-term, it has also tendered for other jobs (mostly government-related) worth about RM6.0b (please refer overleaf for details).

- Tampoi to drive future earnings growth. On 26-December 2013, Gadang (landowner) has entered into a JV Agreement with Capital City Property Sdn Bhd for the proposed integrated property development in Tampoi, Johor. This project is basically the 2nd phase of “Jentayu Residensi”. The GDV of the total project is estimated at RM1.8b and will be completed in the next 5 years. The project will feature 10-storey retail podium, 3 tower blocks of office (SOHO), and two (2) tower blocks of hotel suites. Interestingly, Gadang as the landowner, has agreed with Capital City that the latter will pay up to 16.7% of total estimated GDV of RM1.8b or RM300.6m. We estimate Gadang’s total net profit from this project at RM194.5m throughout the 5 years development. On average, the project will contribute about RM39m per year until FY19 and the management expects the profit to kick in as early as FY15.

- Forecasts. We introduced our FY15 net profit of RM39.3m with the expected net profit growth of 30%. The net profit growth is driven by: (i) Gadang’s new contracts’ assumption of RM350m for FY15 following higher chances of getting new phase of RAPID’s earthworks, and (ii) unbilled property sales of RM320m (Vine Residency, Phase 1 of Jentayu Residency, Pokok Sena)

- New TP of RM2.00, positives has been priced in. Gadang’s share price climbed by 111% since our last OR piece on 30th July 2013. After we roll forward our valuation parameter to FY15, and benchmarked against 10x fwd PER, we derived a new Target Price of RM2.00. At 10x fwd-PER, this is in line with average fwd-PER of its small-cap construction peers. Due to the

limited upside, we believe most of the recent positives has been priced in. Take Profit.

- Nonetheless, it is still an attractive long-term investment. Despite our Take Profit recommendation, Gadang’s long-term growth prospect remains intact. Gadang is one of the MRT1 contractors and it is also one of the Petronas contractors. Thus far, it has executed both projects well. Due to the excellent track records, we believe it will win one of the recently-approved MRT2 packages and other Petronas jobs. We also have only assumed 5.5% success rate of its total tenderbookofoaboutaRM6.35b..If Gadang could secure more than our expectations we may re-look at our rating and valuation for the stock.

Source: Kenanga