• MYR0.58 FV based on SOP valuation. We envisage Gadang to be in the sweet spot to secure more jobs (especially infrastructure) in light of the anticipated project roll outs by the Government. Future earnings will be anchored by its strong focus in government jobs, property projects in Selangor and Johor, and recurring income from its utilities arm. In light of these factors, we view its valuation as undemanding – trading at 15.6x FY25F P/E vs the Bursa Malaysia Construction Index’s forward P/E of c.19x.

• Commendable orderbook prospects. The group has c.MYR1.1bn worth of work orders in hand as at end of May 2024 (translating to an orderbook/revenue cover ratio of 4x based on FY24 construction revenue). We view its edge in public infrastructure projects may potentially put the group in a strategic position to leverage on the anticipated job roll outs from the Government. In the past, Gadang’s exposure in government-related projects was rather diverse – comprising government hospitals, rail projects, and highways. Job replenishment prospects are backed by the group’s tenderbook size of c.MYR2-3bn (estimated success rate of 20-25%), which mostly relates to infrastructure projects.

• Earnings estimates. We are projecting a 3-year (2024-2027) earnings CAGR of more than 50% for Gadang, largely in tandem with stronger orderbook replenishment and property market prospects. Recurring net profit margin is expected to be at 3.0-3.9% in FY25F-27F, taking into account yearly replenishment order assumptions of MYR500m for FY25-26 and MYR400m for FY27, combined with lower cost pressures from projects secured before or during the Russia-Ukraine crisis in 1QCY22.

• Valuation. We ascribe a FV of MYR0.58 based on our SOP valuation. For the construction arm, we selected construction players involved in infrastructure jobs ie Gamuda (GAM MK, BUY, TP: MYR9.68), IJM Corp (IJM MK, BUY, TP: MYR4.34), Sunway Construction (SCGB MK, BUY, TP: MYR6.29), and Gabungan AQRS (AQRS MK, BUY, TP: MYR0.50) as peers. We apply a 40% small cap discount for Gadang to derive the target valuation of 15x as most peers have a market capitalisation of >MYR1bn and have an average P/E (market capitalisation weighted) of c.25x. We also value the property arm based on a 65% discount to RNAV while valuing the utilities business (water supply, mini hydropower, and solar photovoltaic) via a DCF valuation assuming a weighted average cost of capital (WACC) of 11.5%.

• Rerating catalysts include faster-than-expected rollout of big-ticket projects such as Mass Rapid Transit 3 (MRT3) along with more wins from the data centre space.

• Key risks: Sluggish job replenishment trends, unexpected fluctuations in the price of building materials, and sudden shortage in labour supply.

Source: RHB Research - 5 Aug 2024