Gadang Holdings Bhd
(Oct 29, RM1.55)
Maintain “buy” with target price (TP) of RM2.57: Gadang started off its first quarter financial year 2015 (1QFY2015)  by registering RM133.4 million in revenue, and a net profit of RM9.5 million. Quarter-on-quarter (q-o-q), revenue declined by 3.9%, while net profit increased by 3.2% q-o-q. On a year-on-year basis, it showed an increase in revenue and net profit of 17.5% and 23.4% respectively.

The Group’s 1QFY15 results accounted for 11.8% of our full-year estimates and 16.8% of consensus forecasts. Still, we deem the results were within expectations as historical trend indicated that recognition of construction billings in first half of financial year 2015 (1HFY15) was normally lower and work-in-progress shall start to pick up strongly in 2HFY15. Furthermore, the group has yet to book in its net gain of joint-venture (JV) development in Capital City property project in Johor with our estimation of RM25.1 million in FY2015 based on property sales of RM150 million.

On a y-o-y basis, profit before tax (PBT) in the construction division increased by 87.3% from RM5.5 million to RM10.3 million.  This was on the back of a revenue increase of 21.5% thanks to a better contract value and higher progress billing from ongoing projects, coupled with improved PBT margin of 3.3 percentage points to 9.4%.

However, the group’s net earnings were partly affected by lower PBT in several divisions like property (due to higher marketing costs despite higher revenue achieved), utility (disposal of an Indonesian subsidiary and the weakening of the rupiah) and plantation (continuous harvesting activities).

Gadang’s current outstanding order book for its construction division stands at RM1.3 billion, which could provide the Group’s segmental earnings visibility for the next two to three years. We expect the group to easily achieve or even surpass our new order book win assumption of RM400 million for FY2015, as Gadang has bagged a RM350 million Refinery And Petrochemicals Integrated Development or Rapid 2 project for this financial year.

Moving forward, with the group’s experience and proven track record, we believe it is in a better position to secure more infrastructure works, that are highway projects such as the West Coast Expressway, the Sungai Besi-Hulu Kelang Elevated Expressway and the Damansara-Shah Alam Elevated Expressway as well as mass rapid transit or MRT 2 and light rail transit or LRT 3. Further affirmation by the government in its commitment to carry on with these projects in its recent budget puts Gadang in a good position for its order book replenishment.

As for earnings outlook, we made no changes to our earnings forecast as we envisage stronger result in 2HFY15.

Maintain “buy” with unchanged TP of RM2.57. We advise investors to accumulate the stock as we believe the strong earnings potential of the group has yet to be fully priced and we see the value of the stock re-emerges following recent across-the-abroad selldown on the small- and mid-cap stocks. We continue to favour the group for its well-diversified business model.— JF Apex Research, Oct 29

This article first appeared in The Edge Financial Daily, on October 30, 2014.