INVESTMENT MERIT

- 4Q13 beats our expectation. Recall, Gadang announced its 4Q13 result last week. It appears that its share price reacted negatively and had lost 8.0% to 92 sen since the results announcement. However, we reckon this under-researched counter has been misunderstood by the market. In fact, stripping out the one-off noncash items (i.e. impairment of goodwill consolidation of RM7.7m), Gadang’s full-year core net profit of RM27.6m beats our expectation by a great magnitude, making-up 135% of our earnings estimates. Operationally, Gadang performed very well with its  FY13 core net profit improvement of +91% YoY, thanks to sterling performance of its property and utility divisions. Utility division’s pre-tax profit jumped by 110% YoY driven by water tariff revision. Meanwhile, its property division’s pre-tax profit also rose significantly, by 134% to RM25.5m thanks to strong sales recognition and higher margins from its projects (i.e. Jentayu Residence and Salak South) and a sale of its Penang land. 

- Strong cash-flow paves the way for expansion. Gadang’s cash balance increased by 170% YoY to RM134.0m in FY13 due to its land sales, which translates into a net cash/share  of 26 sen. We understand that Gadang is planning to utilize the cash for landbanking in the Klang Valley and other investments. The group sits on a comfortable total GDV of c. RM2.0b which will last them 8 years. In addition, Gadang is also considering investing in minihydro projects in Indonesia to expand its utility division’s earnings base.

- Outstanding orderbook still healthy at RM1.4b with 59% coming from MRT1 (V2: Kota Damansara – Dataran Sunway) package (RM809m), followed by Shah Alam Hospital (RM278m) and RAPID earthworks Package 1 (RM254m). This will provide earnings visibility for the next 3 years. 

- Imputing RM300m new contract replenishments in FY14. The group is concentrating on unique civil jobs like hospitals and heavy-volume earthworks as there are fewer competitors implying better margins compared to other construction jobs. Hence, we forecast FY14 net profit to increase by 5.3% to RM29.9m (+8.6% YoY).

- Trading BUY.  Post-earnings upgrade, our TRADING BUY call is maintained with  higher Target Price of RM1.36 from RM1.15 previously. We are now applying PER of 9x (from 8x) on its FY14E earnings, in line with our small cap construction universe targeted PER as we believe they deserve peer valuations in light of their strong earnings growth profile and unique positioning in the construction sector.

TECHNICALS

- Resistance: RM0.97 (R1), RM1.07 (R2)

- Support: RM0.88 (S1), RM0.77 (S2)

- Comments: GADANG’s bullish trend remains intact despite the 4 straight days of losses. The share price is now nearing a confluence of support lines at 88 sen where some bargain hunting is expected. Nevertheless, should this crucial level be taken out in a decisive manner, GADANG could potentially extend its losses towards 77 sen. Overhead resistance on the other hand is located at 97 sen and RM1.07 further up.

BUSINESS OVERVIEW

Incorporated as public limited company in Oct 1993, Gadang is primarily involved in construction with a wide variety of skills encompassing earthworks, infrastructure works, roads, bridges, buildings, residentials and M&E works. It also involved in property development, utilities concession and oil palm plantation. Gadang is led by its Managing Director cum CEO, Tan Sri Dato’ Kok Onn. 

BUSINESS SEGMENTS

- Construction division.  Construction segment is the largest contributor to Gadang’s earnings which accounts for 77% of its total revenue in FY12.

- Property.  Second major contributor in Gadang’s earnings is its property division which accounting for 16% of its total revenue. It has total landbank of more than 90 acres with total GDV of RM2.0b which will be developed in the next 8 - 9 years.

- Utility. Gadang also has utilities division (7% of FY12 revenue) in its business which it owned 5 concessionaires (various stakes) in Indonesia. 

- Plantation. Gadang has made its foray into plantation when it  signed an agreement with the Sabahan’s landowners to develop  2 parcels of land in 2009.

Source: Kenanga