Strong outstanding orderbook of RM1.1b. As of 4QCY15, GADANG has a healthy outstanding orderbook of RM1.1b and unbilled property sales of RM200.0m, which would easily last for another two years. Out of the outstanding orderbook of RM1.1b, 72% were from RAPID earthwork/infrastructure work with the remaining 28% from MRT and Shah Alam Hospital projects.

A rosy year ahead. For CY16, management is as excited as we are for the construction sector as it would be a “fruitful” year for contractors underpinned by abundance of infrastructure jobs like MRT2, LRT3, RAPID and highway jobs with contract award news-flow expected to kick in closer to 2H16. We believe that GADANG would be one of the front-runners for these projects given their strong track record and completion timeliness in previous MRT1 and RAPID earthworks.

A highly achievable target. To recap, the beginning of CY15 was extremely slow for GADANG as they did not manage to secure substantial contract awards in 1HCY15, except for two infrastructure works from RAPID in 4QCY15 totalling up to RM560.0m. That said, management is still guiding conservative replenishment target of RM500m-RM600m for CY16 out of their on-going tender book of RM2.0b (excluding MRT2 and LRT3) of which RM1.0b is from RAPID. However, we strongly believe that management’s target is highly achievable, underpinned by the abovementioned projects coupled with the fact that management is still eyeing for more hospital projects in the region. Hence, we are assuming a total RM1.4b worth of orderbook replenishments for FY16-17E, and we expect the bulk of the replenishments to come in by FY17.

Slow & steady on property. Unlike its construction division, management’s tone on its property division is more conservative. Under current market conditions, management is hoping to replicate its previous year’s sales performance of RM200.0m mainly driven by affordable housing projects i.e. Laman View (GDV: RM184.0m) and its on-going project i.e. The Vyne (GDV: RM427.0m). Nonetheless, management are planning for more affordable housing projects especially on the parcel of land which was acquired recently in Semenyih (GDV: RM500.0m). To recap, its latest unbilled sales stands at RM200.0m, providing 1-1.5 years of visibility.

Forecasts. Projecting FY16-17E net profit of RM70.3-87.2m which implies net profit growth 19.7-23.9%. The net profit growth is driven by: (i) Gadang’s new contracts’ assumption of RM1.4b for FY16-17E following underpinned by the visibility of major infrastructure jobs available, i.e. MRT2, LRT3, SUKE, DASH, and RAPID coupled with its (ii) unbilled property sales of RM200m from its on-going projects i.e. The Vyne.

Priced-in for now. We are valuing Gadang at a Fair Value of RM2.44 based on Sum-of-Parts valuation where we valued its: (i) construction division at 12x FY16 PER which is inline with our small-mid cap targeted PER of 9-13x, and (ii) property division at 5x FY16 PER which is inline with HUAYANG’s implied valuation of 5.2x. (Kindly refer overleaf for more details). At our fair value of RM2.44, it implies 8.2x FY16 PER which we believe is fair, given its huge exposure in the property market which makes up 47% of its pre-tax profits in FY15. Hence, we have a Non-Rated call on the stock. However, we do believe that the re-rating catalyst for GADANG lies on several factors, i.e. (i) FY16-17E orderbook replenishment exceeding RM1.4b, and (ii) an improved sentiment on the property sector. 

Source: Kenanga Research - 21 Jan 2016