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Saturday, October 29, 2016

Gadang: BUY maintained with revised TP of RM3.70 (from previously RM3.40) by JF APex Research

Author: Chang Wt | Publish date: Fri, 28 Oct 2016, 10:20 PM

 Gadang recorded top line of RM104.6m and bottom line of RM16.7m for its 1QFY17 in which revenue plunged 58% qoq and 30% yoy whilst net profit sank 45.3% qoq and 20% yoy. The unappealing performance in 1QFY17 was mainly attributed by lower work recognition in construction segment and weary margin in property segment.
 Within expectations- 3MFY17 revenue and net profit matched 14% and 21% of our topline and bottom line forecast for FY17 respectively.

 Insipid work recognition for Construction segment in 1QFY17 – Construction segment posted RM42.1m revenue and RM8.4m PBT in 1QFY17 with revenue slumped 76.7% qoq and 60.2% yoy. Meanwhile, PBT slid 60.4% qoq given a strong base in 4QFY16. However, PBT inched up marginally by 1.3% yoy in view of higher PBT margin achieved in current quarter. We believe PBT margin of 20%, +8.2 pts qoq and +12.1 pts yoy, are not sustainable and expected to fall in coming quarters along with higher construction work being recognized.
 Construction works underpinned by RM603.6m outstanding order book and foreseeable strong replenishment - Construction order book stood at RM603.6m as of 31 August 2016 which will sustain its revenue visibility over 1.3 year or 1.3 times of FY16 revenue. Management has guided that the Group has tendered over RM10b worth of jobs, namely RAPID, KVMRT2, DASH and SUKE. We believe the Group stays high chance to further replenish its order book given its experience in both KVMRT1 and RAPID jobs. Should the Group manage to secure a viaduct package of KVMRT2, its order book will surpass RM1b mark.
 Property segment bogged down by lower margin – Property segment recorded RM56.2m revenue and RM13.4m PBT in 1QFY17, decreased 11.3% qoq and 22.7% qoq respectively given a slide in PBT margin of 3.6pts to 23.9%. Notably, property segmental revene soared 47.2% yoy but PBT dropped 19.2% yoy, mainly due to a higher base in 1QFY16, lifted by JV Capital City project in Johor Bahru, which commands high margin.
 Property launches mainly focusing on affordable and mid-range products that in line with current market demand. We learnt that the group is planning to launch new phases of Laman View, Cyberjaya, consisting 469 units of PRIMA apartments with GDV of RM157m and 194 double storey houses with GDV of RM173m, in December 2016. Webelieve the favourable product mix of affordable and landed houses will still enjoy resilient demand under current soft market and hence further raising its unbilled sales.
 Property segment is underpinned by its healthy unbilled sales of RM221m. As of 31 August 2016, its unbilled sales render revenue visibility over 1.35 times of FY16 property segmental revenue. The group has achieved new sales of RM27.2m in 1QFY17. Looking forward, we are positive that the group is able to sustain its encouraging new sales in view of the favourable product mix offering.
 Steady earnings from Utility Segment – Utility segment contributed RM5.6m top line in 1QFY17, improving 13.7% qoq and 10.5% yoy. As such, 1QFY17 PBT of RM1.9m recorded a growth of 38.1% qoq and 74.9% yoy. The improvement in utility segment was attributed to better operating margin. Looking forward, we expect utility segment continues to contribute steady earnings to the group. With the completion of construction for its 9-megawatt mini-hydro power concession PT Ikhwan by mid-2019 and upon full commissioning, the Utility segmental earnings are expected to contribute significantly to the group.
 The Board has proposed earlier on: a) 1 for 1 share split, b) 1 for 4 of new subdivided shares bonus issue and warrants, and c) ESOS of up to 15% of the issued and paid-up share capital. The exercise will see outstanding shares to expand from 258.6m to 646.5m with possibility of reaching up to 775.8m shares after taking into account the warrants conversion. Thus, the group’s EPS will be diluted by 66.7%. We are positive with the corporate exercise, as it will improve the liquidity of shares trading in the market. Besides, bonus issue normally remains as a positive psychology catalyst in the market.
Earnings Outlook/Revision
 No change to our earnings forecast for FY17F and FY18F.

 Maintain BUY on Gadang with a higher target price of RM3.70 (from RM3.40). We derived our valuation by pegging at PER of 12x FY17F EPS of 31sen. The valuation is in line with its growth potential by bagging more construction works in future. The target PE assigned is at the range of upcycle PE for small-and-mid cap contractors amid current booming infrastructure works.
 We continue to favour the Group for its well-diversified business model as well as its ability to achieve satisfactory growths across all divisions. Looking forward, we are sanguine on Gadang’s earnings given the favorable property unbilled sales of RM 221m coupled with its sizeable construction order book of RM606m with high chances of lifting its future order book from prospect projects such as RAPID and KVMRT2.

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