Gadang Holdings Bhd (July 25, 88.5 sen)
Maintain sell with a lower target price of 63 sen: Gadang Holdings Bhd reported a net loss of RM3.4 million for its fourth quarter ended May 31, 2019 (4QFY19) result as compared to a net profit of RM13.4 million for its 3QFY19 and RM23.2 million for its 4QFY18.
The group registered a lower profit before tax (PBT), down -85% quarter-on-quarter (q-o-q), bogged down by lower margin from the construction segment and higher finance costs (such as expenses of bank borrowing cost on investment properties RM2.6 million).
Again, the lower year-on-year (y-o-y) PBT was mainly due to unfavourable performance in the construction and property segments.
The group’s FY19 was below our/consensus expectations, matching 68.7%/67% of full-year net earnings forecast. The discouraging performance was mainly attributable to lower profit margin from the construction segment.
The construction segment’s PBT tumbled 99.3% q-o-q and 99.1% y-o-y to RM130,000, no thanks to margin compression in view of higher labour costs and material costs coupled with variation order in 4QFY19.
The group has secured order book of RM124.5 million year to date, which accounts for 41.5% of our RM300 million target order book for FY19.
As such, its current order book stands at RM1.24 billion. We believe that the outstanding order book will sustain the group’s construction revenue visibility close to 2.5 years or 2.5 times of FY19 construction revenue.
Gadang eyes securing more contracts from the revival of the East Coast Rail Link (ECRL) and Bandar Malaysia Projects.
To recap, on April 18, Gadang entered into a pre-bid consortium agreement with DWL Resources Bhd to work with each other to bid for infrastructure projects.
Based on the group’s track record and expertise, we believe the consortium stands high chance to secure a contract from the ECRL.
Property segments’ revenue was up 61.7% q-o-q but down 18.8% y-o-y, while PBT surged by 93.4% q-o-q but tumbled 63.7% y-o-y.
Weaker y-o-y performance was mainly due to lower margin and sales recorded from the Capital City project in Johor.
Unbilled sales stood at RM119.34 million, which render revenue visibility over 64% of FY19 property segment revenue.
Looking forward, the group will undertake more aggressive marketing activities to promote sales of its ongoing and completed projects, such as Laman View, Cyberjaya; Elegan, Puchong and Bandar Puncak Sena, Kedah.
We expect also the property market to remain weak. As such, we believe this will delay the new launches of property development projects for the next one to two years.
Utilities segment’s revenue inched up 4.1% q-o-q and 5.2% y-o-y. On top of that, PBT/PBT margin improved 35.6%/8.4 percentage points q-o-q.
Looking ahead, the construction of 9mw mini hydropower plant is expected to be completed in FY20. As such, we envisage that utility sector will continue to perform better thereafter.
The group declared first and final dividend of 1.2 sen per share. This translates into a dividend yield of 1.3% based on current share price of 91 sen per share.
We slash our earnings forecasts for FY20 by 23% from RM70 million to RM53.8 million as we account for lower margin from construction and property segment. Meanwhile, we introduce our FY21 net earnings of RM58.1 million with a y-o-y growth of 7.9%. — JF Apex Securities, July 25
This article first appeared in The Edge Financial Daily, on July 26, 2019.
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