Author: SJSOON | Publish date: Fri, 2 May 15:26
S.J.SOON 02 May 2014
| Counter (Code) | GADANG (9261) | Call | Outperform |
| Sector | Construction | Target Price (Upward Potential) |
RM 3.06 (75.67%) |
| Shares Outstanding | 196,691,218 | ||
| Market Capitalization | MYR 342,242,719.30 | Last Price | RM 1.74 |
| Exchange | KLSE | Indices | Syariah |
| Trading Board | Main | Last Fiscal Year End | 31 July 2013 |
Why is GADANG a good buy?
GADANG is indeed an undervalued gem with positive growth potential. The company’s management has strategically transformed it to be an all-rounded player by vigorously expanding its existing businesses to segments other than construction that once was its primary source of income. Nowadays, GADANG has thriven to be an outstanding performer with good track records and sound fundamental. The recent optimistic recommendation made by those brokerage houses has led to the stock price hike of this counter. Given the surprisingly high fair price valuation (beyond RM 2.00), it has attracted and raised market participants’ concerns, particularly those value investors, about the company’s tremendous positive growth prospect. Of course, the sudden substantial price surge from RM 1.10++ to RM 1.96 in April could be attributed to the short-term speculation hype on this counter. After the minor correction triggered in last Monday, it is believed that GADANG would enter a consolidating phase and wait for new catalysts to boost the stock price then.
By adopting the Discounted Free Cash Flow (FCF) Model, with the assumption that the expected overall revenue growth rates would have recorded 32.00% (which is based on the CAGR projection estimated by the company management) for the next three financial years, namely from FY 2014 to FY 2015, the target price of share is supposed to be RM 3.06 and traded at forward exit multiple of 5.73x (on three-year average basis). This represents an upward potential of 75.67% and thus, having conducted a detailed and careful stock analysis, an "OUTPERFORM" rating follows.
Company Profile
GADANG is an investment holding company which currently engages in several business segments, such as construction and civil engineering, property development, plantation and public utilities. To date, the business revenue contributed by the first three segments are mainly generated from domestic market in Malaysia while the public utility division primarily operates in Indonesia.
The construction division has become the pillar that contributes the most to the overall income of the company. With its registrations of Grade A with Pusat Khidmat Kontraktor and Grade 7 with Lembaga Pembangunan Industri Pembinaan, the division stands a competitive advantage to secure major public infrastructural construction projects in open tenders, to name a few, Petronas’s RAPID phase I earthwork civil engineering contract, Klang Valley MRT Phase I Package V2 (Sungai Buloh - Kajang Line), Hospital Shah Alam Construction Package 2 (Design and Build).
It is then followed by property development division which recently involves in development projects of PRIMA affordable housing property in Cyberjaya, Pokok Sena (Kedah) as well as luxury residential housing property in Kuala Lumpur and Johor Bahru. The plantation division was established in 2009 and engages in oil palm cultivation in Sabah. The public utility division obtains water supply concessionaire with which it provides services of construction, maintenance and management of water treatment plant.
Segmental Revenue Analysis
Referring to the latest quarterly earnings report, the revenue surged by 67.85% q-o-q while the net profit growth registered 410.75% q-o-q. At the same time, the y-o-y growths of revenue and net profit record 55.11% and 85.00% respectively. At least, this delivers a good sign about the significant improvement of company’s business earnings performance. The healthy order book in construction segment which amounts to approximately RM 10 billion to date and enormously-improved earnings results in property segment owing to lucrative on-going development projects ensure the earning visibility of the company that may sustain for the next three to four years. Plus, the plantation division and public utility division are expected to strive and increasingly generate recurring income that could be used to support the regular dividend policy in future proposed by the management in October last year. The details of the segmental earnings results are as follows.
The number of shares issued is supposed to remain at 196,691, 218 units without further share dilution. The following property development projects, according to the company’s news updates, commence in 2014.
Property Development Segment
|
|||||
Projects
|
Period
(Years)
|
GDV (RM)
|
Expected Net Profit (RM) or Effective Profit Margin
|
Annualized Average Net Profit (RM)
|
Effect to Annual EPS (Cents)
|
| Capital 21 Joint Venture Project in Johor Bahru |
5.5
|
1.8 bil.
|
218 mil. or 12.21%
|
40 mil.
|
20.31
|
| PRIMA Affordable Housing Property Development in Cyberjaya |
10
|
1.0 bil.
|
100 mil. or 10%
|
10 mil.
|
5.08
|
| Jentayu Johore at Tampoi (Phase 2) |
3
|
369 mil.
|
74 mil. or 20%
|
24.7 mil.
|
12.54
|
| KL Vyne Luxury Serviced Apartment (Phase 2) |
3
|
213 mil.
|
42 mil. or 20%
|
14 mil.
|
7.12
|
| Residential Housing Property Development in Pokok Sena, Kedah (Phase 1) |
3
|
108 mil.
|
16.2 mil. or 15%
|
4.5 mil.
|
2.29
|
Construction Segment
|
||
| Value of Order Book (RM) |
1.10 bil.
|
Remarks
|
| Net Profit Margin (RM) |
3.00%
|
Projects participated: - Pengerang Phase I - Hospital Shah Alam - Klang Valley MRT |
| Period (Year) |
3
|
|
| Annual Net Profit (RM) |
11 mil.
|
|
| Effect to Annual EPS (Cents) |
5.59
|
|
Public Utility Segment
|
||
| Value of Order Book (RM) |
15 mil.
|
Remarks
|
| Net Profit Margin (RM) |
40.00%
|
- Treated water concession plants and mini hydropower plants. - The management intends to raise the segmental contribution from RM 15 mil. to RM 30 mil . |
| Period (Year) |
-
|
|
| Annual Net Profit (RM) |
6 mil.
|
|
| Effect to Annual EPS (Cents) |
3.05
|
|
Plantation Segment
|
||
| Value of Order Book (RM) |
20 mil.
|
Remarks
|
| Net Profit Margin (RM) |
20 %
|
- The planted area is 5181 acres and located in Sabah. - Oil palm trees age 2 – 5 years old. - Significant earnings contribution is expected to materialize in the second half year of FY 2014. |
| Period (Year) |
-
|
|
| Annual Net Profit (RM) |
4 mil.
|
|
| Effect to Annual EPS (Cents) |
2.03
|
|
Based on the financial information stated in the most recent quarterly earnings report, the revenue growth rates for the next financial years, from FY 2014 to FY 2016, are conservatively set to be 50%, 32% and 32%. The expected earnings performance of the company in the following years is shown below:
Earnings Performance across Financial Years (EPS - Cents)
|
|||||||
FY2011
|
FY 2012
|
FY2013
|
FY2014
|
FY2015
|
FY2016
|
Reference
FY2013 Profit Margin
|
|
| Property Development and Investment |
4.49
|
8.11
|
17.14
|
22.40
|
28.40
|
34.40
|
34.36%
|
| Construction |
(3.48)
|
7.06
|
4.31
|
5.82
|
5.59
|
6.32
|
2.88%
|
| Public Utility |
1.23
|
1.10
|
2.32
|
3.05
|
3.05
|
3.05
|
26.56%
|
| Plantation |
(0.25)
|
(0.39)
|
(0.39)
|
1.00
|
1.50
|
2.03
|
-
|
| Pre-tax EPS |
1.99
|
15.89
|
23.38
|
32.27
|
39.07
|
45.8
|
-
|
| Adjustment |
(4.57)
|
(8.54)
|
(12.97)
|
(6.51)
|
(8.29)
|
(9.33)
|
-
|
| Net EPS |
(2.58)
|
7.35
|
10.41
|
25.76
|
30.78
|
36.47
|
5.77%
|
| PE (Price = 1.74) |
-
|
23.67
|
16.71
|
6.76
|
5.65
|
4.77
|
|
Comment about the Profitability of Business
The company implements strategic plan to diversify its income base and source so as to avoid its earnings performance from over relying on the construction sector, with current share of about 70% whose earnings contribution is typically adversely influenced by the business cycle. The management has recently put much effort in raising the earnings contribution share of property development division from current approximately 20% to 40% by 2016. It is foreseeable that the future income bases from property development and construction segments will be much more evenly distributed by which their earnings contribution share will have recorded 40% each while the remaining 20% is contributed by public utility segment and plantation segment. The business expansion in public utility segment in Indonesia, particularly the division’s target to double its revenue growth, will lead to significant increase in net recurring income to the company. The earnings contribution of plantation division which was initially set up in the year end of 2009 is expected to materialize in the second half of FY 2014. With the expectation that the CPO price will recover in near future owing to excess demand and shrinkage of supply caused by dry weather, the future profit generated from this segment will climb up gradually. The growth of recurring income base from these two segments will enable the management to establish a regular dividend policy in near future, though the company has declared dividend payout for the past two financial years.
The company’s strategic business diversification, the launches of up-coming lucrative property development projects and healthy order book of infrastructural construction contracts will allow earnings visibility and sustainability at least for the next 6 financial years.
Future Prospects Highlights
1. There is a positive trend in construction sector in
Malaysia amidst more contracts awards of civil engineering and
infrastructural development projects, such as the KVMRT Phase II, West
Cost Expressway and Kinrara-Damansara Expressway, to come within the
period from 2H 2014 to 1H 2015.
|
2. The open tender of Petronas’ RAPID Phase II Project is
under the assessment now and is expected to release the bidding results
in 2H 2014. Gadang with good track record of participation in the phase I
earthworks project has a competitive edge to secure the up-coming
project. Furthermore, it would capitalize its skilled experienced
labours and cost advantage of CAPEX that had been incurred while
executing phase I projects for RAPID and KVMRT.
|
3. The total contracts bidding amount to date records
approximately RM 60 billion and the company management is confident to
secure 50% out of it.
|
4. The development project of affordable housing property
meets the existing huge demands. The sale revenue may not be adversely
affected by the government's curbing measure that mainly targets on
luxury housing property.
|
5. The joint venture project with City Capital (M) Sdn Bhd in
building a mixed-use property Capital-21 that comprises retail podium,
hotel and SOHO office suites let Gadang which plays a role as landowner
earn a windfall gain of approximately 219.7 million net for the next 5.5
years, representing an annual income approximately RM 40,000,000 or EPS
20 cents, supposing no termination of the project and share dilution.
|
Financial Fundamental Highlights
| 1. Last-twelve-month (LTM) net cash position records MYR 0.16 per share. |
| 2. The LTM gearing ratios: (Liability/Equity) equals 0.93x,
(Liability/Asset) equals 0.48x, interest coverage ratio equals 34.80x. 3. The LTM liquidity ratios: current ratio equals 2.37x, quick ratio equals 2.37x, cash ratio equals 1.63x. 4. The LTM credit statistics: (Debt/EBITDA) equals 1.52x |
| 5. The proceeds from on-going joint venture development
projects (e.g. Capital 21) will be used for landbank acquisition, new
investment, interests and borrowings repayments. With such, the gearing
ratio (Debt/ Equity) is expected to reduce from 0.31x to 0.15x. The company possesses a very fundamentally-sound financial management. The financial health would enable the company to cushion against any adverse impact just in case any macroeconomic crisis broke out. |
1. The unanticipated adverse effect of the more stringent curbing measures, such as revision of RPGT, stamp duty and restriction on property asset buying to foreigners, that may dampen the prospect of housing property sector in Malaysia.
2. The possible upward revision of Bank Negara’s monetary interest rate in the 2H 2014 associated with tightening credit macro-prudential policy measures, such as limiting the households’ debt leverage, will lead to negative impact to the property development segment.
3. The cost of construction surges significantly as a result of increased inflation attributable to recent upward revision of the prices of building materials and minimum wage. The construction sector also encounters tight labour supply which then leads to wage rise. Consequently, this will erode the profit margin in construction segment.
Conclusion
It is believed that the recent stock price hike by approximately 70% in April was primarily attributed to the investors’ optimism about the expected substantial earnings contribution from Capital 21 Joint Venture Development Project in Johor Bahru as well as the speculation hype which rode on such positive news to reap whooping profit in stock trading. However, the speculation hype does not last long and the price has been undergone correction, approximately by 12.64%, and is expected to enter consolidating phase for these few days. Waiting for upcoming catalysts to re-rate the company, it is advisable for value investors to accumulate the shares whenever there is any technical weakening sign in the market. In long term, this analysis report is optimistic about the growth prospect of the company and maintain “OUTPERFORM” rating in medium/long term.
-End-
9M14 results to be announced today, expect better performance QoQ and YoY. Gadang will be announcing its 9M14 results today. Excluding gains from land sale in Penang of about RM11m last year, we expect 9M14 net profit to surge by as high as 200% driven by: (i) outstanding orderbook of more than RM1.0b and (ii) unbilled property sales of about RM320m. QoQ, we expect 3Q14 profit to slightly improve by 5-10%.
- Amongst the early beneficiaries of RAPID. We believe that Gadang will likely be amongst the early beneficiaries of recently-approved high profile oil & gas project, the USD27b RAPID in Pengerang, Johor. Recall, we have mentioned in our Construction 2Q14 Strategy Report that RAPID will likely benefit contractors that already have presence in the project such as Gadang which now undertaking Phase 1 of the project’s earthworks. We gather the Phase 2 of the earthworks will amount up to RM350m - RM500m. If Gadang wins Phase 2, we expect the margins will be much better than that of Phase 1 as it can save on the mobility costs as it has already deployed all its equipments and machineries in the existing area. Assuming Phase 2 of RAPID earthworks will be announced this year, with a pre-tax margin of 10%, we estimate the project will add another RM12.5m per year to Gadang’s bottomline until FY17.
- Earnings visibility intact with outstanding orderbook of RM1.1b. Current ongoing projects include: (i) MRT1 V2 package (RM724.7m), Shah Alam hospital (RM191.1m), and site preparation works for RAPID (Phase 1) (RM189.1m). All of these jobs are running on schedule and more importantly provide Gadang with earnings visibility for the next 2-3 years.
- Tenderbook of RM6.0b. Besides RAPID Phase 2 which it is highly likely to secure in the near-term, it has also tendered for other jobs (mostly government-related) worth about RM6.0b (please refer overleaf for details).
- Tampoi to drive future earnings growth. On 26-December 2013, Gadang (landowner) has entered into a JV Agreement with Capital City Property Sdn Bhd for the proposed integrated property development in Tampoi, Johor. This project is basically the 2nd phase of “Jentayu Residensi”. The GDV of the total project is estimated at RM1.8b and will be completed in the next 5 years. The project will feature 10-storey retail podium, 3 tower blocks of office (SOHO), and two (2) tower blocks of hotel suites. Interestingly, Gadang as the landowner, has agreed with Capital City that the latter will pay up to 16.7% of total estimated GDV of RM1.8b or RM300.6m. We estimate Gadang’s total net profit from this project at RM194.5m throughout the 5 years development. On average, the project will contribute about RM39m per year until FY19 and the management expects the profit to kick in as early as FY15.
- Forecasts. We introduced our FY15 net profit of RM39.3m with the expected net profit growth of 30%. The net profit growth is driven by: (i) Gadang’s new contracts’ assumption of RM350m for FY15 following higher chances of getting new phase of RAPID’s earthworks, and (ii) unbilled property sales of RM320m (Vine Residency, Phase 1 of Jentayu Residency, Pokok Sena)
- New TP of RM2.00, positives has been priced in. Gadang’s share price climbed by 111% since our last OR piece on 30th July 2013. After we roll forward our valuation parameter to FY15, and benchmarked against 10x fwd PER, we derived a new Target Price of RM2.00. At 10x fwd-PER, this is in line with average fwd-PER of its small-cap construction peers. Due to the
limited upside, we believe most of the recent positives has been priced in. Take Profit.
- Nonetheless, it is still an attractive long-term investment. Despite our Take Profit recommendation, Gadang’s long-term growth prospect remains intact. Gadang is one of the MRT1 contractors and it is also one of the Petronas contractors. Thus far, it has executed both projects well. Due to the excellent track records, we believe it will win one of the recently-approved MRT2 packages and other Petronas jobs. We also have only assumed 5.5% success rate of its total tenderbookofoaboutaRM6.35b..If Gadang could secure more than our expectations we may re-look at our rating and valuation for the stock.
Source: Kenanga
9M14 results to be announced today, expect better performance QoQ and YoY. Gadang will be announcing its 9M14 results today. Excluding gains from land sale in Penang of about RM11m last year, we expect 9M14 net profit to surge by as high as 200% driven by: (i) outstanding orderbook of more than RM1.0b and (ii) unbilled property sales of about RM320m. QoQ, we expect 3Q14 profit to slightly improve by 5-10%.
- Amongst the early beneficiaries of RAPID. We believe that Gadang will likely be amongst the early beneficiaries of recently-approved high profile oil & gas project, the USD27b RAPID in Pengerang, Johor. Recall, we have mentioned in our Construction 2Q14 Strategy Report that RAPID will likely benefit contractors that already have presence in the project such as Gadang which now undertaking Phase 1 of the project’s earthworks. We gather the Phase 2 of the earthworks will amount up to RM350m - RM500m. If Gadang wins Phase 2, we expect the margins will be much better than that of Phase 1 as it can save on the mobility costs as it has already deployed all its equipments and machineries in the existing area. Assuming Phase 2 of RAPID earthworks will be announced this year, with a pre-tax margin of 10%, we estimate the project will add another RM12.5m per year to Gadang’s bottomline until FY17.
- Earnings visibility intact with outstanding orderbook of RM1.1b. Current ongoing projects include: (i) MRT1 V2 package (RM724.7m), Shah Alam hospital (RM191.1m), and site preparation works for RAPID (Phase 1) (RM189.1m). All of these jobs are running on schedule and more importantly provide Gadang with earnings visibility for the next 2-3 years.
- Tenderbook of RM6.0b. Besides RAPID Phase 2 which it is highly likely to secure in the near-term, it has also tendered for other jobs (mostly government-related) worth about RM6.0b (please refer overleaf for details).
- Tampoi to drive future earnings growth. On 26-December 2013, Gadang (landowner) has entered into a JV Agreement with Capital City Property Sdn Bhd for the proposed integrated property development in Tampoi, Johor. This project is basically the 2nd phase of “Jentayu Residensi”. The GDV of the total project is estimated at RM1.8b and will be completed in the next 5 years. The project will feature 10-storey retail podium, 3 tower blocks of office (SOHO), and two (2) tower blocks of hotel suites. Interestingly, Gadang as the landowner, has agreed with Capital City that the latter will pay up to 16.7% of total estimated GDV of RM1.8b or RM300.6m. We estimate Gadang’s total net profit from this project at RM194.5m throughout the 5 years development. On average, the project will contribute about RM39m per year until FY19 and the management expects the profit to kick in as early as FY15.
- Forecasts. We introduced our FY15 net profit of RM39.3m with the expected net profit growth of 30%. The net profit growth is driven by: (i) Gadang’s new contracts’ assumption of RM350m for FY15 following higher chances of getting new phase of RAPID’s earthworks, and (ii) unbilled property sales of RM320m (Vine Residency, Phase 1 of Jentayu Residency, Pokok Sena)
- New TP of RM2.00, positives has been priced in. Gadang’s share price climbed by 111% since our last OR piece on 30th July 2013. After we roll forward our valuation parameter to FY15, and benchmarked against 10x fwd PER, we derived a new Target Price of RM2.00. At 10x fwd-PER, this is in line with average fwd-PER of its small-cap construction peers. Due to the
limited upside, we believe most of the recent positives has been priced in. Take Profit.
- Nonetheless, it is still an attractive long-term investment. Despite our Take Profit recommendation, Gadang’s long-term growth prospect remains intact. Gadang is one of the MRT1 contractors and it is also one of the Petronas contractors. Thus far, it has executed both projects well. Due to the excellent track records, we believe it will win one of the recently-approved MRT2 packages and other Petronas jobs. We also have only assumed 5.5% success rate of its total tenderbookofoaboutaRM6.35b..If Gadang could secure more than our expectations we may re-look at our rating and valuation for the stock.
Source: Kenanga
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