JF Apex Research starts coverage on Gadang, target price RM1.43

by **Cals** Wed 13 Nov 2013, 14:03

Business & Markets 2013

Written by theedgemalaysia.com

Wednesday, 13 November 2013 11:01

KUALA LUMPUR (Nov 13): JF Apex Research has initiated coverage on Gadang Holdings Bhd with a Buy call and target price of RM1.43, and said the under-researched company deserves to be re-rated in view of its: 1) sizeable outstanding order book of RM1.26 billion (3.5x FY2013 revenue); 2) total RM425 million worth of property launches earmarked for FY2014; 3) intention to boost its utility division by increasing capacity in existing water treatment business while diversifying in to mini hydro power generation; 4) potential of winning more projects under the construction division as it is bidding for projects worth RM6 billion in total; and 5) explosive earnings growth at a 3-year-CAGR of 32% from FY2014-2016.
In a note Wednesday, the research house said Gadang’s current outstanding order book of RM1.26 billion (3.5x FY2013 revenue) comprising MRT Package V2, Shah Alam Hospital and RAPID earthwork would be able to provide earnings visibility for the next 3 years.
“Moving forward, the Group is targeting for projects worth more than RM6 billion in total.
“Near-term order book replenishment could come from the second phase of RAPID worth estimated RM300 million, expected to be awarded by earlier 2014, after having clinched the site work in the first phase,” said the research house.
JF Apex Research said Gadang derived its recurring income solely from its utility division, in which the Group treats 880 litres per second (lps) of water via 3 concessionaires in Indonesia while currently in negotiation to increase the capacity to 1,250 lps.
Apart from that, the Group is set to diversify the utility business by venturing into mini hydro power generation, it said.
“However, we understand that the contribution from the new business would only kick in over the longer term as the construction of infrastructure and facilities takes around two years.
“By then, along with the additional capacity from the water division, the total PBT contribution of the utility division shall be able to surge beyond the RM10 million level from RM4.4 million in FY2013,” it said.
The research house said Gadang’s cash piles ballooned to RM83 million (42sen/share) in FY2013 from RM29.7 million in FY2012, mainly due to the variation order (VO) arising from the KLIA2 project.
It said the net gearing as of FY2013 was close to zero thus providing the Group ample room to gear up for further land bank acquisition as well as supporting its venture into the power generation business.
“Besides, the Group is also contemplating to distribute dividend on a regular basis by adopting a stated dividend policy to reward long-term investors should the cash flow continues to be stable,” it said.