Gadang scaling greater heights

by **Cals** Fri 11 Apr 2014, 14:31

Business & Markets 2014

Written by JF Apex Securities

Friday, 11 April 2014 10:33

Gadang Holdings Bhd
(April 10, RM1.41)
Maintain buy with target price of RM2.67: Gadang is set to announce its results for the third quarter ended Feb 28 of financial year 2014 (3QFY14) results on April 24. We expect the results to be in line with our earnings forecast or slightly better, thus bringing net earnings for the nine-month period (9MFY14) to around RM25 million (+40% year-on-year [y-o-y]).

For full FY14, we expect the group to achieve net profit of RM33.4 million, which implies full-year earnings growth of 63% y-o-y. The earnings will be largely underpinned by the accelerated progress of the mass rapid transit (MRT) V2 package worth RM863.4 million.

Gadang’s construction division registered RM12.1 million in profit before tax (PBT) as of the six-month period ended Nov 30 (6MFY14), up 163% y-o-y as the progress of its projects accelerated, particularly the RM863.4 million MRT V2 package. The division, having contributed 54% of the group’s 6MFY14 PBT, is expected to continue to be the main force in sustaining the earnings growth.

Meanwhile, we understand that the second phase of the groundwork package for Petroliam Nasional Bhd’s refinery and petrochemical integrated development in Pengerang, for which the group has put in a tender, has been delayed to the second half of calendar year 2014.

The group has inked a joint-venture (JV) agreement with Capital City Property Sdn Bhd to develop 84 parcels of freehold land in Johor Baru, owned by Gadang, measuring 4.86ha with gross development value (GDV) of RM1.8 billion. Gadang will be paid 16.7% of the total GDV or up to RM324 million during a time span of 66 months or 5.5 years, which translates into net gain of around RM220 million or around RM40 million per year (excluding land cost of RM31 million and 25% corporate tax rate).

However, we understand that the gain will only be recognised progressively starting FY15, with construction commencing in October 2014. The land is located strategically at Jalan Tampoi.

Some 70% of the GDV, equivalent to RM1.3 billion, is earmarked for retail malls, while the remaining portion will be for hotels and office suites.

We will impute the earnings contribution from Capital City’s project into our earnings forecast after further clarification with the management. As a result, FY15F and FY16F earnings are nudged higher by 74%-93% while FY14F earnings remain unchanged.

We like Gadang for its diversified business model with exposure to construction, property, utilities and plantation. The newly clinched JV project with Capital City could drive earnings in the medium term with FY15F net earnings poised to grow by 123% y-o-y.

Gadang’s outstanding order book of about RM1.0 billion will provide earnings visibility in the next two years with order book replenishment in the pipeline as the group is bidding for projects worth RM6.0 billion.

We roll over our valuation and peg our target price at 7.7 times fully diluted FY15F earnings per share (EPS), which is in line with its three-year mean price-earnings ratio. — JF Apex Securities, April 10

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This article first appeared in The Edge Financial Daily, on Aprill 11, 2014.