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Thursday, December 28, 2017

SOS Can Gadang double in 2 years time?

Author: sosfinance | Publish date: Mon, 25 Dec 2017, 04:17 PM

QUESTION FROM A SHAREHOLDER in tha Nov 8 AGM (Gadang's website)

Q: Capital City share of GDV is about RM324 million. How much has been recognised and how many more years to be recognised?

A: Currently, the Company has recognised about RM60m (P&L), thre is still about RM260m to be recognised within next 2 years. (Response from Dato' Ling Hock Hing). Many investors, including analysts thought it was substantially recognised.

WHAT IS THE ESTIMATES GADANG'S CURRENT VALUATION?

Gadang's business operations consist of three segments:

1. Construction

Book order of about RM1.9b (MRT2 RM1b, Cyberjaya Hospital RM500m, TRX Road 400m, plus others). Expected to be recognised in 3-3.5 years. Able to achieve around 10% PAT margin.

2. Property

Sale order of RM119m, 1Q of FYE2018.

Expected to launch RM500m FYE 2018. Remaining GDV about 3-5b. Focus mainly on affordable housing + JV Kwasa Land, JV in Puchong Land, Semenyih Land, Damansara Land, JV in Cyberjaya Land + Share of GDV of Capital City.

3. Concession Assets

Owns 4 water concessionaires in Indonesia. Improving tariff.

One mini hydro electric, coming onstream in last quarter of FYE2018.

One PV solar power panel, coming onstream FYE18/19.

Concession Assets was only RM28m in 2013. Today, it is about RM100m and more to come. Growing concession assets will provide sustainable earnings in the future.

FYE 2017

Profit after tax of about RM100m.

FYE2018 - FYE2020

Average PAT of about RM130m p.a.

Currently, based on latest quarterly, net cash of about RM50m. So, market capitalisation net of cash is about RM655m.

Using average estimated PAT of RM130m and PE of 10x, market capitalisation is about RM1.3b.

Estimated fair value is RM1.3b/658m shares = RM1.98 per share. (This has not include new contracts secured till FYE2020)

WHAT IS THE UPSIDE FROM 23 DEC 2017 AT RM1.07 PER SHARE

Please note that the estimation of the intrinsic value of RM1.98 per share does not give a guarantee that the share price will achieve it within one month or one year. Estimates of intrinsic value does not mean timing the market.

However, if we believe that in the next 3 FYEs, it can achieve the PAT of RM130m p.a., it is hopeful the share price can gradually reduce the gap to its the fundamental.

The prospective PE (FYE2018-2020) is RM655m/RM130m = PE of 5X.

So, I won't be suprise of the share price will run up gradually in the next 1-2 years nearer to its intrinsic value (plus minus 10%).

WILL IT BE A GREAT CHRISTMAS GIFT?

Too bad, not for 2017, perhaps for 2018? Should there be new contracts secured over the next one few years, I won't be suprise if it can double the current "unpopular" share price of RM1.07.

For the record, I have interest in Gadang at RM1.28, as well as RM1.07 per share. So far, 2017, I have received a dividend of 3 sen per share or a dividend yield of 2.3% p.a.

I prefer to work on perspective earnings for next few years rather than per quarter basis, as it may not be reflective especially for construction and property sectors.

This may not be popular among short term investors or speculators as their focus is on foward quarterly basis and extrapolate it accordingly. Hence, Gadang shares may not be suitable for speculators or investors with short term horizon (less than one year), i.e less than one year. In a short run, market is a voting machine and in a long run, it is a weighing machine (of course, we must review it regularly on the fundamental of the company - which don't change drastically in the short term).

Gadang, and some of the construction companies with properties businesses may not be "popular" at the moment (due to property overhang). Best time to buy a stock when it is least popular or "ignored" by the investor community.

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