LETS TAKE A LOOK AT THEORY FIRST

I leave that to the professional.  

TRV calculated the Fair Value in Sep 2016 using 3 methods, based on FYE2015 (not sure why he didn't use FYE2016 since the results was announced by end of July 2016.  Perhaps, he wanted to wait for the audited figures to be sure)

1. EPV    3.253

2. DCF    3.148

3. BenG  3.364

4. For those who are not familiar with EPV (like me) is Adjusted Earnings divided by Cost of Capital.  Go to his website to take a look.

5. I did ask if he can do another one, using FYE2016.  

6. I used his formula, replaced some of the figures using FYE2016, the EPV method shows the FV is about RM3.68 (taken into account that FYE2016 has a net cash of RM94.4m (as per RHB) and enlarged number of shares from private placement to 258.6 million shares)

7. So, that's for theory.  Let's not split hair over the details.  We can debate until the cows come home, and there is no right or wrong in those valuation method.  It just gave us a REFERENCE.

I HAVE A THEORY, I LIKE TO CALLED IT ALTERNATE THEORY

Alternate theory, also cannot be proven right or wrong, because, a lot of elements is based on market reality, which changes everyday.

The analyst using his or her "sophiscated" SOP method (round up figure):

1.   Construction   using PE 10X  (RM)                410m

2.  Property 65% x RNAV                                     330m

3,  Water, Power & Plantation                                70m

4.  Net Cash                                                          100m

    TOTAL                                                               910m/258.6m shares

SOP method   =      RM3.50 per share.

From a glance, I find that his/her method is very conservative.  For Kwasa Land, the valuation is only RM16.3m (RNAV of RM25m x 65%).  The estimated GDV used is about RM700m.  The RNAV is calculated using NPV@12%.

5.  Again, is just a theory.  Just best guided estimate, not something fall from the sky.

WHAT ABOUT "FALL FROM THE SKY" METHOD

1.  Construction (I believe they can achieve 10% and 500m contract p.a.)           RM500m

2.  Property (About RM5.4 billion - from analyst)                                                   RM400m

3.  Water, Power & Plantation

     (water - invested RM70m+Power RM80m+Plantation (AreaxEV/ha)               RM200m

4.  Net cash                                                                                                           RM100m

TOTAL                                                                                                                  RM1,200m/258.6

5.  Fair value is roughly   RM4.64

6.  I don't have track record for my accuracy.  For conservative calculation, I gave myself a discount of 20%.

7.  My discounted FV (reluctantly) =  RM3.70

WILL THE THEORISTS BE RIGHT?

1. So, based on the above, we have a range of RM3.50, RM3.68 and RM3.70.

2. "Fall from the sky" method is RM4.60 per share

LETS COME BACK TO REALITY

1.  Based on latest earnings of FYE2016, RM94m and adjusted number of shares after PP (proportioned, issued in April 2016), EPS is about 40sen.

2. At Friday's price of RM3.20 x 258.6 m shares = RM828m (market cap).

3. EV = market cap less cash, RM828m - RM94.4m = RM734m

4. Next couple of years (average earnings p.a.) is about RM100m.  

5. So, the implied PE is about 7.34X

6.  Hope this is not overvalued.

CAPITAL 21 ISSUE

I was informed by my fund manager, the share of profit is calculated based on progress billing.  Not sale. Not even if it turn out as some kind of coloured elephant.  I hope my fund manager don't lie to me.  Finger cross.  

Part of the hidden gem is in Capital 21, in term of cash flow (the analyst is overly conservative on their RNAV calculation, underestimated by about 30 sen upside) - updated 25 Oct 2016.  Even the share of profits is based on sales and progress billing, Gadang is protected with a guarantee profit of about RM324m (cash and/or units), timing of the profits is important, but not critical.  

LABOUR ISSUE

I remember when I was with the plantation sector, we faced a lot of labour issue.  Similarly now the construction sector.  Even when I was with shipping, same old issue, not enough experience good workers (because oil and gas sector took everyone away).

DO I HAVE TO JUSTIFY MYSELF?

Please don't follow blindly.  Do your own homework.  Price may drop 20% or up 20%, due to foreign in or out flow.  No one can tell and not my near term problem.

Unfortunately, this in not in the list for "short selling counters".  I strongly suggest, investors or speculators who think certain stocks that are OVERVALUED, short it, its available now.  Go to bursamalaysia.com, there are 240 in the list.

OOPS ALMOST FORGOT (Part 4.1)

1.  5 years ago, not many knew Gadang.  It was only 60 sen.  Doing PE of 7.7X.  

2.  Mr Fong Siling, is already in before Sept 2014, at between 90 sen and 120 sen.  The only thing he knew at that time, perhaps, the company is going to grow.  That time he only knew the profits was RM20m and SF of RM262m.  He definitely have no idea new contracts or property development Gadang getting into.  

3.  FYE 2016, the profits grow to RM94m and SF RM530m.  Now the Group includes Water, Power & Plantation (although still young)

4.  Today, using a PE of 8.5x using FYE17 of RM100m.  

5.  Besides the MRT2, rumours also said they may get the "Hospital project, the second one after Shah Alam".

UPDATED AFTER THE "12% DROPPED IN SHARE PRICE ON 28 OCTOBER 2016, FRIDAY"

GADANG STOCK PRICE DROPPED 40SEN, FROM RM3.30 TO RM2.92 @ 28 Oct 2016 (For information only - personal consumption) Updated on 31 Oct 2016 Mon (Before market starts)

1.  Gadang stocks up 22% last two months before reaching RM3.30 - other construction stocks also went up at the same time from 23% - 27%, such as GKent, Econpile, Ekovest.  Construction sector run

2.  Gadang price move up a lot since March 2016, from RM2.10 to RM3.30 (27 Oct 2016).  Only two news was announced, Multiple Proposal (Bonus, Split and Free Warrants) and Kwasa Land deal (est RM700 - 800m).  Market expect Gadang 1Q17 to do a better than previous years.

3.  Gadang result dropped 20% from RM3.30 (Thur) to RM2.92 (Fri).  (According to analysts results is in line).  But the market (speculators or traders or stockists or syndicates) punished it by selling down (gap down), share price dropped by 12% from 330 sen to 292 sen, total of about 40 sen down.

4.  Last one month volume was high, around 1m to 4m prior to the drop (usually Gadang's volume is half). 

5.  A day before the dropped of 12% on 28/10/16 after the result on 27/10/16, the volume was about 1.5m.  On 28/10/16 Fri, the volume ballooned to 28.5m.  Volume increased almost 20X.  (could be few reasons, margin call, panic players, those who take opportunity to clear, negative gossips (behave like experts), recent  2 months constructions run (24% average up), some who annualised the latest quarter (fearful), many, many reasons - mainly non fundamental)

6.  The high volume of 28.5m could be due to various reasons, trader sell, stokists play, margin call (high margin call on this stock, the gap created a panic situation), SYNDICATE PLAY, irresponsible rumour mongers shouting the sky is falling, 

7.  The 12% dropped on that day is due to many reasons, over expectations of Gadang performance (sentiment), contruction play (sentiment), multiple proposals and kwasa land (high expectations).

8.  IMHO, fundamental remain intact.  Likely could be syndicate and margin call.  Not sure how long it last.  Fundamentally it should worth about RM4.00 (SOP method).  

9.  1Q17, Net current assets = RM300m or RM1.16per share.  Net cash = RM83 or about 32 sen per share (1Q17)

10.  Shareholders fund is about RM546m or RM2.11/share, Invested in Water/Plantation/Power so far RM120m (to invest another RM60-80m).  Invested in LAND is about RM230m in book value (GDV of 5.5b).  

11. Unbilled sales RM220m for property,  Orderbook for construction is RM605m.  Can easily last 1.5 years.

12.  High expectation of getting MRT2, however, still not announced.  (This could be another reason traders and speclators are fearful).  It is true that investors and traders and speculator are CONCERN about the ORDERBOOK.  I agree.  Perhaps, the fear materilised when they found out the result is WORST than their PERSONAL/MARKET expectations (not analysts).

13.  I like to highlight One of the Analysts visited and reported on 18 Oct 2016.  

"WE REITERATE BUY GIVEN ITS SOLID EARNINGS VISIBILITY AND UNDEMANDING VALUATION.  (TP3.50)  THIS ANALYST PROJECTED NEXT 3 YEARS PROFITS AVERAGE AT RM100M."

14. I suspect, when they said, solid earnings visibility, the management must have given them a positive guide on the expected contract to be secured (however, too preliminary to mention until something is executed).  Based on previous guidance, according to fund manager, they are conservative management, meaning, the result meet their guidance.  

Of course, this cannot be substantiated, however, can only based on previous guidance.  

How the market react on MONDAY nobody will know, but we do know this analyst (I think is a lady), will not put her neck out this way.  Something may have convinced her to make that statement (upgrade target price from RM2.97 to RM3.50), SOLID EARNINGS VISIBILITY and UNDEMANDING VALUATION, else, she may get bashing from the fund managers if she cannot substantiate the statement. (I can understand some investors take analysts report blindly and got burn and deduced all analysts are useless - for me, there are always some good one among the entire breed, and it is NOT FAIR to make a sweeping statements for all analysts are lousy just because some make a wrong call).

15.  imho - keep until  it is at least RM4.00 (please do your homework, this is not a buy, sell or hold call).  Structurely some are worried about the ORDERBOOK, I can understand. Investment must be INDEPENDENT and RATIONALE. I hope genuine investors don't be swayed by the negative noises.    DO YOUR OWN HOMEWORK.  No short cut. 

16. Will be inaction and let the syndicate/margin call subsides, will look at it later.  At, 290sen less dividend 7 Sen, less net cash, 29 Sen, = RM2.54per share, close to SF. 2.54 x 258.6 share = RM657m (assume PAT 80m to 100m), PE = 6.6x to 8.2x

(WB said, risk comes from not knowing what you are doing, it is not the market players that add risk to the stocks, it is what they do to themselves - I hope players in the market can differenciate between personal risk (not knowing) and business risk (threats and fundamental weaknesses)

All business has inherent business risks, hence the different PEs, and perceptions.  In a long run, it will show is fair value.  I have said a few times, it is not appropriate to compare Gadang with IJM Corp and Gamuda, gadang is only about RM750m and IJM, Gamuda is about RM12 BILLION and expect Gadang to behave like the SOLID BIG PLAYERS.  If I assume Gadang's PE should be similar to IJM and Gamuda, isn't it irrationale?  Just because someone don't like CONSTRUCTION SECTORS due to uncertainty in orderbook, too competitive, volatility of building materials and labour issues, that does not mean they cannot overcome and become bigger in the long run.  Both IJM and Gamuda, may start off with RM100m market cap, slowly and gradually move up the ladder.  

MOST important question, can the MANAGEMENT handle it in the long run and gradually moving into SUSTAINABLE biz.  Management already recognised the VOLATILITY of construction sector, acted on it and going to spend/spent from RM150m to RM200m into this business & EXPANDED into PROPERTY (mainly affordable and JVs and landed).  We must FOLLOW their ACTIONS, not mere sweet words as many CEO trying to deliver.  Of course, if what they say and what they do is TOTALLY contradictary, we should be worry.

17. I notice, past 3 years Gadang orderbook ranges from RM657m to RM1.300m, the revenue produced last 2 years is only RM450-480m.  Even with such revenue, the PBT is commendable at RM49-71m giving average PBT Margin of 12.5%. So, we should not be overly worried for FYE17 as the orderbook is 1.35X of revenue  

18. Similarly, the last 3 years unbilled sales from FYE14-16, is RM155m, 189m and 232m.  The revenue produced for property for last 2 years is RM119m and RM172m (FYE16).  PBT last 2 years is RM40m and RM53m.  Average PBT Margin is 32%.  This is high for property sector.  On the same premise, I believe Gadang can produce similar results with high unbilled sales.

19. As for the bumpy 1Q17 results, it does not represent the entire FYE17.  This is norm for construction and property sectors, we can observe this in Gamuda and IJM Corp as well. 

20.  It is fruitless to explain fundamentals when the shares is so driven by sentiment (volume 28m, when the last 30 days is 1-4m). You cannot calm a panic crowd, when they are consumed with fear.  How can a fearful person think calmly and rationally. Added with some not well research facts and information, many participants are taken over by fear.  Syndicates love fear, like sharks love blood.  

21.  Lets us hope, the sooner they calm down the better.  This is a good lesson to be learned here. This will separate a good/seasoned investor from an inexperienced investor.