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Thursday, January 25, 2018

RHB Research raises Gadang target price to RM1.48

Thursday, 25 Jan 20189:03 AM MYT

KUALA LUMPUR: RHB Research is maintaining its Buy call on Gadang with a target price of RM1.48, which is just four sen above its last traded price of RM1.44.

The research house said on Thursday its FY18-20 net profit forecasts were adjusted by +3%, +4%, and +5% respectively, as it imputed higher construction billings and lower contributions from the property segment.

RHB Research said its sum-of-parts derived TP is raised to RM1.48 after the earnings revision.

“At our TP, Gadang would be trading at a compelling FY18F P/E of nine times, in comparison to the small cap construction sector’s P/E range of 10 to 12 times.

“We maintain our positive stance on Gadang for its earnings visibility driven by its sizeable outstanding orderbook, as well as proven track record and reputation. Downside risks include weaker-than-expected margins, and failure to replenish its orderbook,” it said.

RHB Research said Gadang currently trades at an undemanding FY18F P/E of only seven times, which is unwarranted, in its view.

“We believe downcast expectations for its property division have already been reflected in its share price. Its construction division, on the other hand, is backed by an outstanding orderbook of RM1.6bil, which supports earnings for the next three years.

“Further orderbook replenishment opportunities lie in the LRT3 and Pan Borneo Sabah projects,” it said.

Gadang reported 2QFY18 net profit of RM28.3mil (+2% on-year), which contributed to a 1H17 net profit of RM46.7mil (+5% on-year).

After adjusting for one-off items, including a loss on disposal amounting to RM1.3mil following the sale of its plantation assets, it derived a core net profit of RM48.8mil (+9% on-year).

“This accounted for 47% of our FY18 forecast, in line with our and consensus estimates. Earnings were driven by the construction segment,” it said.

Gadang’s property division had a poor showing in the second quarter, with profit before tax falling 42% on-year as take-up rates for its developments remain subdued.

The construction division, however, more than made up for the shortfall, with profit before tax more than doubling (+105% on-year).

This was underpinned by billings from its current contracts on hand, in addition to variation orders for completed projects, which propelled the segment’s profit before tax margin to 30%.

“We remain upbeat on construction. Outstanding construction orderbook tapered slightly to RM1.62bil from RM2bil a quarter earlier – which should provide earnings visibility for the next three years.

“Looking ahead, we are forecasting an orderbook replenishment rate of RM500mil for FY18.

“Gadang is vying for one of the remaining RM2bil work packages for the Light Rail Transit Line 3 (LRT3) project, as well as contracts from the Pan Borneo Sabah project, which would likely be awarded in 1H18.

“Gadang launched phase 2 of its Cyberjaya development comprising PRIMA apartments and double-storey houses in 1Q17, with a total GDV of RM337mil.

“However, we gather that the rest of FY18 would likely be more quiet – with only its joint venture project in Putra Perdana (GDV: RM160mil) likely to be given the green light,” said RHB Research.


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