Review

• Excluding extraordinary gains totalling RM3.2mn, GADANG’s FY24 core net profit of RM1.5mn (+165.6% YoY) fell short of our expectations, making up only 15.2% of our full-year estimates. This negative variance was primarily due to higher-than-anticipated project operating costs and tax expenses.

• YoY, GADANG’s FY24 revenue increased by 17.6% to RM583.6mn, driven by higher revenue recognition in the construction division and improved property sales. As a result, core PBT rebounded to RM11.3mn from a core LBT of RM0.9mn, supported by higher contributions from the property division and the utility division, despite being partially offset by losses in the construction division.

• QoQ, 4QFY24’s revenue grew modestly by 6.6% to RM150.5mn. However, GADANG recorded a core LBT of RM7.2mn, a decline from a core PBT of RM7.3mn in 3QFY24. The losses were mainly attributed to higher project operating costs and prolongation costs for certain construction projects coupled with lower work progress from the property division.

Impact

• Given the weaker-than-expected results, we have made the following adjustment on our FY25/26F’s earnings estimates:- (i) revised our progress billing and margin assumptions for certain ongoing construction projects, and (ii) adjusted our effective tax rate assumption higher, considering the historically high tax structure. As a result, our earnings estimates for FY25/26F have been revised downward by 21.6% and 35.8%, respectively. Additionally, we introduce our FY27F earnings estimates, anticipating an earnings growth of 16.0%.

Outlook

• As of end-May 2024, the group's construction order book and unbilled property sales stood at RM1.1bn (equivalent to 4.1x FY24 construction revenue) and RM202.3mn, respectively, indicating a positive earnings outlook. The property division is expected to remain a key earnings contributor, supported by attractive sales incentives. However, we are cautious about the construction division's progress, which may face higher operating costs due to delays.

Valuation

• Following the earnings revision, we reduced our SOP-derived target price to RM0.37 (from RM0.55), inclusive of ESG premium 3% based on our 4- star rating. Downgrade the stock to Sell from Hold previously due to negative risk-reward ratio.

Source: TA Research - 25 Jul 2024