Gadang Holdings Bhd
(May 16, 83 sen)
Upgrade to buy (previously neutral) with a higher target price (TP) of 95 sen: Gadang Holdings Bhd’s prospects have improved with the revival of public infrastructure projects, which constitute 100% of its current outstanding order book. We have raised our financial year 2020 (FY20) to FY21 earnings forecasts by 5%, assuming higher new order wins of RM500 million (from RM200 million). Gadang is taking a more aggressive stance in bidding for new projects, raising fresh capital and enlisting a new partner to jointly bid for upcoming tenders.

FY19 has been relatively uneventful for Gadang, securing new orders amounting to RM136 million (FY18: RM475 million) so far. The new orders comprise two Tun Razak Exchange (TRX) packages and a firefighting facility for the Refinery and Petrochemical Integrated Development (Rapid) in Pengerang. Its outstanding construction order book stands at RM1.3 billion compared with RM1.6 billion a year ago (peak order book: RM2 billion). Management highlighted that it had been focusing on completing existing jobs to ride out the period of uncertainty. Of note is the upcoming completion of its Rapid contract in June, where it has submitted a variation order that could be recognised in the first half of FY20 if approved.

Gadang has announced that it is forming a pre-bid consortium with DWL Resources Bhd and will take up a 10% stake in the company for RM18 million. Management highlighted that the move is strategic, allowing both companies to leverage each other’s strengths to improve their chances in tenders.

Meanwhile, Gadang has announced a private placement of 10% of its outstanding share capital, with the intention of utilising proceeds to pare debt and as working capital for existing and future projects. Management noted its interest in participating in the pre-qualification tender for the East Coast Rail Link, as well as tenders for further TRX, Rapid and hospital projects in order to replenish its construction order book.

Unbilled property sales stood at RM93 million as at February 2019, down from RM134 million in February 2018, with only one new property launch in December 2018 — Putra Perdana (gross development value [GDV]: RM173 million). Planned new launches for FY20 include Phase 3 of Laman View, Cyberjaya (GDV: RM153 million), Phase 3 of The Vyne, Kuala Lumpur (GDV: RM112 million) and Phase 1A of a project in Semenyih (GDV: RM66 million). Gadang has also revised the joint-venture terms of its Capital City project in Johor Baru, where it is the landowner.

Key risks include failure to secure new contracts, and a prolonged downturn in the retail and property markets. — RHB Research Institute, May 16