Investment Merits

• Outstanding orders provide medium term earnings visibility

• Riding on local infrastructure boom with room to take on more jobs

• Building up landbank at prime locations

• Oil palm plantations and hydro power plant are long term growth engines

Company Profile

Gadang Holdings (Gadang) is involved in civil engineering and construction, property development, water supply, mechanical and electrical engineering services, and oil palm plantation.

Highlights

Outstanding orders provide medium term earnings visibility. We are confident that Gadang would be able to at least maintain its robust earnings recorded in FY16 for next two financial years. The outstanding construction orderbook (MYR527m), that is partly made up of variation order (VO) claims and unbilled property sales (MYR187m) as at Nov 2016, should provide strong earnings visibility over the next 12-18 months. Separately, its utilities unit continues to churn out stable earnings from four water supply concessions in Indonesia – more than offsetting minor losses at its plantations division.

Beneficiary of local infrastructure boom. Gadang has established itself as a niche player in large-scale earthworks contracts. While the company has yet to win any major construction jobs thus far in FY17, its track record in the Mass Rail Transit (MRT) Line 1 suggests a good chance that it would play a role in MRT Line 2. It is also keen on participating in Light Rail Transit 3 (LRT3), High Speed Rail (HSL) projects, and other infrastructure projects. Meanwhile, we deem our MYR300-500m annual orderbook replenishment assumption for the next two years to be conservative, given its present tenderbook of more than MYR3bn, with many other pipeline projects scheduled to be called for tender or awarded in the coming months.

Building up landbank at prime locations. On top of its existing landbank, Gadang was recently awarded the development rights for a 24.08-acre plot called R3-1 within the Kwasa Damansara township, by master developer, Kwasa Land SB, with estimated GDV of MYR700m. First launch, expected by end-2018 or early-2019, would be driven by surrounding developments. Separately, the company recently acquired a piece of leasehold commercial land located in Damansara Perdana, Petaling Jaya, Selangor. The land was transacted at MYR55.69m, and measures approximately 10,779 square meters (2.664 acres), with a 99-year leasehold interest. We believe the company may eventually carry out mixed commercial development on this land given that the current zoning for the said land is commercial, with an allowable plot ratio of 1:4.

Long-term growth engines in place. Aside from the two main business units above, Gadang’s management expects its 2,600 acres of planted oil palm with average maturity of 4-5 years to start contributing positive results from FY18. Meanwhile, contributions from its 60%- owned 9MW new hydro power plant in Indonesia should begin from FY19. We understand that there is good potential for tariffs to be revised higher for its power supply agreement, which would directly boost IRR for the said project.

Company Report Card

Latest results. After a slow 1QFY17, Gadang made a comeback with PAT of MYR27.9m in 2QFY17, thanks to variation order claims received, together with the completion of certain construction projects, and progressive claims for its property projects.

Balance sheet/cash flow. The company ended FY16 with a small net cash position, which should allow Gadang to take on more projects. The company have room to leverage on its solid balance sheet and decent cash flows.

ROE. Gadang’s ROE surged to 20.8% in FY16 on the back of robust earnings from most of its business units. Although we project marginal contraction in ROEs on the back of higher shareholders’ funds, the ratio is likely to remain decent, at high-teen levels going forward.

Dividend. Despite having no fixed dividend policy, Gadang has been paying dividends at a payout ratio of about 20% since FY12. With solid medium term earnings visibility, we expect a similar payout ratio going forward.

Management. The company is helmed by managing director-cum-CEO Tan Sri Dato’ Kok Onn. He has more than 40 years of experience in the construction sector.

Recommendation

Gadang remains a BUY supported by its strong earnings visibility, as well as its potential to win more projects in the near future. The stock is currently trading at approximately 7x forward P/E vs its peers’ low teens P/Es – this is another strong reason to accumulate the stock, in our view. Our SOP-based TP is unchanged, at MYR1.40.

Source: RHB Securities Research - 5 May 2017