Results Review

• Gadang’s 1HFY17 net profit of RM44.6mn came in within expectations, accounting for 53.4% and 51.4% of ours and consensus’ estimates.

• YoY, 1HFY17 net profit surged 15.6% to RM44.6mn despite the revenue was relatively flat at RM252.5mn. This was mainly due to higher contribution from the property division, which 1HFY17 PBT jumped 45.9% to RM32.6mn, attributed to higher development progress. The property revenue for the same period surged 100.1% YoY. However, this was partially offset by lower earnings recorded by its construction division as 1HFY17 construction revenue and PBT dropped 35.2% and 15.4% respectively.

• QoQ, 2QFY17 revenue and net profit rebounded strongly, leaping 41.4% and 67.1% respectively. The earnings were boosted by stronger performance of both its construction (PBT +82.7%) and property division (PBT +42.6%). The construction division recorded a strong PBT margin of 21.0% in the reporting quarter. The exceptional margin could be lifted by finalization of project accounts and recognition of variation orders.

• The group’s net cash position eased slightly from RM82.6mn to RM67.4mn, or 10.4sen/share.

Impact

• Maintain. We have assumed construction order book replenishment of RM500mn for FY17. If the group fails to secure any construction contract by then, our FY17/18/19 earnings forecasts would be downgraded by 4.5%/12.7%/11.4% respectively.

Outlook

• The outstanding construction order book declined from RM604mn a quarter ago to RM527.2mn as of end November 2016, translating to 1.1x FY16 construction revenue. Currently, the group is eyeing construction projects such as works packages for MRT line 2, LRT line 3, a hospital project and others to replenish its order book.

• For its property division, its unbilled sales dropped to RM187.2mn (approximately 1.1x FY16 property revenue), versus RM221.0mn a quarter ago. Going forward, we anticipate the launch of 469 units of PRIMA apartments and 194 double storey houses at Laman View, Cyberjaya in 4QFY17, to boost the property sales.

Valuation

• No change to our target price of RM1.37, based on unchanged 12x CY17 construction earnings, 8x CY17 property earnings, 12x CY17 utility earnings, and assigned value of RM25k/ha for its oil palm plantation landbank. Maintain our BUY call on the stock.

Source: TA Research - 26 Jan 2017