Gadang has received a Letter of Acceptance from Mass Rapid Transit Corporation Sdn Bhd, awarding the company the works package V206 of MRT line 2 (Sungai Buloh – Serdang – Putrajaya) for a contract sum of RM952.1mn. The work package involves the construction and completion of viaduct guideway and other associated works from Serdang Raya to UPM.

Our View

The long-awaited new construction contract would definitely eliminate a major concern investors have on its depleting outstanding order book. It had been 15 months since Gadang secured the previous construction contract in mid December 2015.

We understand that this is the largest construction project ever secured by Gadang since establishment. With this new job win, we estimate Gadang’s outstanding order book to surge to RM1.4bn, translating into 2.9x FY16 construction revenue. This could provide earnings visibility to the construction division for the next 4 years. Assuming an operating margin of 8%, we expect the project to generate a net profit of RM56.4mn, or 8.7sen/share throughout the construction period.

Impact

The MRT work package secured has far exceeded our order book replenishment assumption of RM500mn for FY17. After factoring in the new contract, we tweak FY18 earnings forecast slightly lower by 2.5% as the contract secured came in late FY17, but raise FY19 earnings estimate by 3.8%.

Valuation

Given its strong execution capability with proven track records, we raise the target PE multiple for the construction division from 12x to 14x, as the division is now backed by strong outstanding order book after the sizeable job win. Following the revision in earnings forecasts and the change in target PE multiple for the construction division, we raise the target price from RM1.37 to RM1.45, based on 14x CY17 construction earnings, 8x CY17 property earnings, 12x CY17 utility earnings, and assigned value for oil palm plantation landbank of RM25k/ha. Maintain BUY call on the stock.

Source: TA Research - 13 Mar 2017