Review

• Stripping off the exceptional gains amounting to RM5.1mn, GADANG's 1QFY25 core net earnings of RM1.1mn fell below expectations, accounting for 7.4% of our full-year estimates. The shortfall was largely underpinned by lower-than-expected project margins amidst the challenging operating environment and escalating input costs.

• YoY, GADANG’s 1QFY25 revenue increased by 14.7% to RM148.5mn, mainly due to the strong performance of its construction division (+58.3%), which benefitted from higher progress billings on several projects. However, this growth was partially offset by a weaker property division (-17.8%), which saw a decline following higher work progress recorded in 1QFY24. As a result, the group’s core net profit plunged by 82.3% to RM1.1mn, mainly due to increased operating costs.

• QoQ, the topline experienced a marginal decline of 1.4%, primarily attributable to the completion of some construction projects in the previous quarter. However, the company returned to the black from a net loss of RM11.4mn, driven by reduced losses from its investment division.

Impact

• Given these weaker-than-expected results, we have adjusted our margin assumptions for some ongoing construction projects to reflect the razorthin profitability margins caused by challenging operating conditions. Consequently, we have revised our earnings forecasts for FY25/26/27F, lowering them by 20.7%/11.6%/10.0%, respectively.

Outlook

• As at end-August 2024, the group's construction order book stood at RM1.1bn, equivalent to 4.1x its FY24 construction revenue, while unbilled property sales amounted to RM245.6mn. This substantial backlog points to a positive earnings outlook. The property division Is expected to remain a key contributor, supported by attractive sales incentives. Nevertheless, we remain wary about the construction division’s progress, as Project Delays Could Lead to Higher Operating Costs, potentially hindering overall performance.

Valuation

• Following the earnings revision, we cut our SOP-derived target price to RM0.31 (from RM0.37), including an ESG premium of 3% based on our 4- star rating. Maintain Sell call on the stock due to adverse risk-reward profile.

Source: TA Research - 24 Oct 2024