Results Review

• Gadang’s 9MFY17 net profit of RM70.4mn came in above expectations, accounting for 84.3% and 82.3% of ours and consensus’ full-year estimates. The variance was due mainly to higher-than-expected construction margin.

• YoY, 9MFY17 net profit was 10.5% higher at RM70.4mn despite a lower revenue of 10.8% at RM381.0mn. The improvement in the bottom line was a result of increased PBT from its property division (+38.8%), which partially offset by 6.5% drop in construction PBT as construction revenue dropped 38.1% during the corresponding period. Even though lower construction revenue was recorded in 9MFY17, which was due to low outstanding order book in hand before it secured the sizable MRT package V206 in March 2017, its construction margin jumped by 8.5%-pts to 25.3%. We believe the exceptional margin was boosted by recognition of variation orders.

• QoQ, 3QFY17 revenue and net profit eased 13.1% and 7.6% respectively. Higher construction PBT (+51.1% as PBT margin surged 11.8% pts to 32.8% pts) was offset by lower property PBT (-11.8%) and higher tax.

• The group’s net cash position eased slightly from RM67.4mn a quarter ago to RM55.6mn, or 8.5sen/share.

Impact

• Following the stronger-than-expected results, we adjust our construction margin assumptions and raise FY17 earnings forecasts by 14.3%.

Outlook

• The outstanding construction order book stood at RM1.4bn as of endFebruary 2017, translating into 2.9xFY16 construction revenue.

• For its property division, its unbilled sales dropped to RM164.2mn (approximately 1.0x FY16 property revenue), versus RM187.2mn a quarter ago. Going forward, we anticipate the launch of 469 units of PRIMA apartment and 194 double storey house at Laman View, Cyberjaya to boost the property sales.

Valuation

• We roll forward our valuation base year to CY18 and raise the target price from RM1.45 to RM1.55, based on 14x CY18 construction earnings, 8x CY18 property earnings, 12x CY18 utility earnings, and assigned value of RM25k/ha for its oil palm plantation landbank. Maintain our BUY call on the stock

Source: TA Research - 20 Apr 2017