INVESTMENT MERIT

GBGAQRS pulled in major order-book replenishment in FY16 securing RM1.7b worth of contracts. Moving forward, they are gunning for more projects from LRT3 and ECRL which we believe they stand a good chance. For property, GBGAQRS is looking to launch their RM1.8b GDV One Jesselton Township in FY17. We are projecting FY17-18E CNPs of RM29.8-58.9m. Trading Buy with FV of RM1.51 based on SoP.

Order-book rebounds. In FY16 alone, GBGAQRS secured RM1.7b worth of contracts – a huge growth in comparison to awards worth RM800m secured throughout FY10-FY15. Current outstanding orderbook stands at RM1.7b providing visibility for the next 3.5 years. Key on-going projects include SUKE highway, PR1MA in Dengkil and Gambang, and Pusat Pentadbiran Sultan Abdul Shah (PPSAS). We believe the surge in contracts secured in FY16 was partly attributed to new CEO Dato’ Azizan Jaafar being in the driver seat. Moving forward, GBGAQRS is eyeing for the LRT3 project and ECRL. Given that the ECRL will run across Pahang, which could intersect with their on-going works in PPSAS, we believe GBGAQRS stands a high chance in securing a portion of the project. In view of these, we have targeted a replenishment rate of RM700m for FY17.

Capex light strategy. For property, GBGAQRS plans to launch their RM1.8b GDV One Jesselton Waterfront in Sabah from 3Q17 onwards. As for their previous developments, i.e. The Peak, Johor (take-up rate of 45%) and Contour, KL (take-up rate of 75%) have reached completion stage in FY16. While we feel that it is going to be another challenging year for their property division due to the stringent loan approvals which is expected to persist throughout FY17, we note that GBGAQRS is looking to go capex-light for their property division, targeting to partner with strategic land owners and they will spend minimum capex on land banking and derive profits from construction works it undertakes.

Addressing its gearing. YTD, GBGAQRS has sold two pieces of land in Damansara Perdana and Kinrara, Selangor for RM55.7m and RM34.7m, respectively. Gains from the land sales amounted to RM15.0m. We believe the land sale is part of their de-gearing exercise and also to fund a larger working capital requirement for their increased construction order-book which they had accumulated in FY16. Post land sales, we expect net gearing to come down to 0.42x (from 0.68x).

Earnings uptick. We are projecting FY17-18E CNPs of RM28.9-58.9m showcasing earnings growth of 32%-98%, respectively on the back of: (i) construction outstanding order-book of RM1.7b coupled with FY17E replenishment rate of RM700.0m, and (ii) property sales worth RM100m in FY17 and RM250m in FY18 for their Jesselton project.

Trading Buy with FV of RM1.51. We are positive on GBGAQRS’ prospects given their favourable position as the main contractor of PPSAS which we believe is set to benefit them further with jobs from ECRL. Hence, we issue a Trading Buy call on GBGAQRS with FV at RM1.51 based on SoP valuation where we ascribed FY18E PER of 11x for their construction division and 6x for their property division. Our applied construction PER valuation of 11.0x is considered fair as it is within our targeted range of 9-13x for small-mid cap contractors given that; (i) GBGAQRS’ construction net margin of 9% is the same as peers’ (KERJAYA, HSL, MITRA, KIMLUN) average of 9%, (ii) outstanding order-book of RM1.7b is within its peers’ range RM1.5bRM2.6b, and (iii) their 2-year Fwd. earnings CAGR growth of 61% triumphs peers’ average of 10% despite its higher net gearing. As for the applied property valuations of 6.0x, we conservatively pegged it towards the lower end of peers’ range of 6-9x. Our TP implies FY18E PER of 10.0x.

Source: Kenanga Research - 16 May 2017