Gadang likely to see earnings visibility for next two years via construction

This article first appeared in The Edge Financial Daily, on April 26, 2019.
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Gadang Holdings Bhd
(April 25, 88 sen)
Downgrade to hold with a higher target price of 98 sen (previously 80 sen).
Gadang’s nine month financial year 2019 (9MFY19) net profit of RM46.9 million came in below expectations, accounting for 64.7% and 60.3% of our and consensus’ full-year estimates. The variance was mainly due to lower-than-expected contribution from its property division, but partially cushioned by stronger-than-expected performance by its construction division

Year-on-year (y-o-y), despite 9MFY19 revenue climbing by 22.0% to RM503 million, net profit was 34.8% lower at RM46.9 million, dragged mainly by normalisation of construction operating margin from 25.6% to 11.6%, and lower contribution from Capital City project, which resulted in the property operating margin deteriorating from 32% to 22.4%.

Quarter-on-quarter (q-o-q), 3QFY19 profit before tax was little changed at RM22.4 million (-0.3%). However, the quarterly net profit weakened by 21.9% to RM13.3 million, mainly due to higher taxation as the effective tax rate surged from 24.6% a quarter ago to 39.7%.

The group’s net debt position broadened further from RM80.2 million a quarter ago to RM103.2 million. Following the 3QFY19 results, we: i) raise  financial year 2019 (FY19) construction revenue recognition assumption but; and ii) reduce contribution from the Capital City project. All in, we cut FY19 earnings forecast by 12.7%

The outstanding construction order book stood at RM1.3 billion, translating into 3.5 times FY18 construction revenue. This is expected to provide earnings visibility to the group for the next two years. It is actively bidding for mega infrastructure projects, which we believe could include work packages for light rail transit Line 3, East Coast Rail Link  (ECRL), Sarawak Coastal Road and Second Trunk Road.

For its property division, its unbilled sales declined further from RM100.9 million a quarter ago to RM93.1 million. With improved sentiment in the construction sector — following the revival of ECRL and Bandar Malaysia, we raise the target price to earning multiple for construction from eight times to 10 times.  — TA Securities, April 25