We are positive on Gagasan Nadi Cergas Bhd (“Nadi”) proposed acquisitions of concession assets which will see more resilient earnings and boost to its bottomline for FY20. BUY with target price of RM0.38 premised on 8.0x PER FY20 closest related peers.

Nadi is an integrated building contractor with exposure on construction, property development, facility management services and utilities. The Group is supported by a construction orderbook of more than RM577m and tender book of RM1.4bn. Current outstanding orderbook will continue to provide earnings visibility until 2021 with a good mixture of public and private projects. We believe Nadi is wellpositioned to secure sizeable amount from the tender book as 90% of the Group’s tender book are pre-qualified tenders given its strong track record in various public infrastructure such as tertiary institutions and hospitals.

Key catalyst comes from their growing concession business which will be the next earnings driver for the group. Recent proposed acquisition of Konsortium PAE Sepakat Sdn Bhd for RM158m is set to double recurring income contribution with an expected annual income of RM13m. The concession agreement which runs till 2035 comes with cash flow streams from 7 polytechnic hostels. The acquisition will be funded by RM6m of internal funds, RM92m of Islamic medium-term notes and RM60m of Convertible Sukuk with conversion price at RM0.32. Inclusive of the acquisition, Nadi holds 4 long term of 20 to 30 years concessions contracts. Notably, the recurring income from concessions will contribute more than 60% to the group profit before tax, with sustainable earnings moving forward.

Nadi which has a dividend policy of 30% may see attractive dividend yield of 5.5% in FY20 as their recurring income from concession kicks in. Balance sheet continues to improve as net gearing ratio was reduced from 0.76x to 0.48x on the back of concession contributions. Post-acquisition profits from the concession will see it trade at a highly attractive PE of 4.8x supported by an estimated 30% growth for FY20 EPS.

Source: Rakuten Research - 16 Dec 2019