Company Results 26 October 2017 Gadang Holdings Berhad Eyeing on better margin in construction segment. Results. Comments

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1 MALAYSIA INVESTMENT RESEARCH REPORT JF APEX SECURITIES BERHAD (47680-X) Company Results 26 October 2017 Gadang Holdings Berhad Eyeing on better margin in construction segment BUY Maintained Share Price Target Price RM1.21 RM1.50 Company Description Gadang Holdings Bhd, through its subsidiaries, provides earthwork, civil engineering and construction projects. Gadang also develops and invests in properties and manufacture ready-mixed concrete. Stock Data Bursa / Bloomberg code 9261 / GADG MK Board / Sector Main / Construction & Materials Syariah Compliant status Yes Issued shares (m) Par Value (RM) 0.50 Market cap. (RM m) week price Range(RM) Beta (against KLCI) m Average Daily Volume 1.78m 3-m Average Daily Value^ RM 2.22m Share Performance 1m 3m 12m Absolute (%) Relative (%-pts) Major Shareholders % Meloria Sdn Bhd Sumber Raswira Sdn Bhd Emprovees Providend Fund 5.19 Historical Chart Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Source: Bloomberg Low Zy Jing , ext. 754 zjlow@jfapex.com.my Results Gadang posted a top line of RM116.7m and bottom line of RM18.3m for its 1QFY18. Revenue and net profit dropped 28.7% qoq and 38.8% qoq respectively in view of a stronger base in the last quarter (4QFY17). However, net profit up 9.8% yoy with revenue improved 11.6% yoy. The better performance on a yoy basis was mainly buoyed by construction segment which mitigated weak performance in property segment. Broadly within expectations- 3MFY18 net profit of RM18.3m meets ours forecast but below consensus forecast, accounting for 20% and 18.8% respectively. Comments Construction performance slid on a quarterly basis in view of a stronger base in 4QFY17 Construction segment posted RM76.8m revenue and RM16.8m PBT in 1QFY18 with revenue and PBT decreased 14.7% qoq and 50.4% qoq respectively. The unfavorable performance was due to contract in PBT margin (-15.8 pts qoq to 21.8% from 37.6%). Meanwhile, on a yearly basis, both revenue and PBT up 82.8% yoy and 11.6% yoy respectively given the progress in its existing projects (RAPID package 301 and 402) and commencement of new projects (KVMRT-V206, TRX and Cyberjaya Hospital) coupled with recognition of some variation orders for completed projects. Looking forward, we expect construction segment to pick up in work recognition following the commencement of new projects. Construction works underpinned by RM1.98b outstanding order book - The outstanding jobs will sustain the group s revenue visibility close to 3.6 years or 3.6 times of FY17 revenue. We understand that the group is selectively bidding for new contracts involving government infrastructure and building projects with our target orderbook replenishment of RM750m for FY18. As of to date, the group has successfully achieved 60% target orderbook following the latest award of Cyberjaya Hospital. Property segment remained lackluster Property segment recorded RM33.8m revenue and RM8.5m PBT in 1QFY18, with revenue slid 50.2% qoq and 39.8% yoy. On the same note, PBT dropped 40.3% qoq and 36.5% yoy. The lackluster performance was fazed by the overall softening in property market. Nevertheless, the group remain focused on affordable homes in line with the current Please read carefully the important disclosures at end of this publication

2 market demand. We understand that the group has launched Maple Residence (Cyberjaya Phase 2B) and PRIMA apartments (Cyberjaya Phase 2A) in June and August 2017 respectively with a total GDV of RM337m. Property segment s unbilled sales stand at RM119.1m - Unbilled sales for the property segment stand at RM119.1m which render revenue visibility over 0.5 times of FY17 property segmental revenue. Looking forward, we are positive on its sales outlook in view of its favourable product mix offerings. We also learnt that its residential development in Taman Putra Perdana, Puchong (GDV of RM160m) is targeted to be launched in end of this year. Utility segment s revenue lifted by water tariff rate adjustment but PBT bogged down by higher operating cost Utility segment registered RM6.2m top line in 1QFY18, inching up 2.7% qoq and 11.6% yoy. Meanwhile, PBT up 50.3% qoq but down 13.7% yoy in view of higher operating cost. Looking ahead, the group s 9-megawatt mini-hydro power concession PT Ikhwan may start to contribute to the group in 4QFY18. Nevertheless, we only expect the concession to contribute significantly to the group by mid-2019, upon its commission and running in full capacity. Earnings Outlook/Revision We retain our earnings forecasts for FY18 and FY19. Valuation/Recommendation Maintain BUY on Gadang with an unchanged target price of RM1.50. We derive our valuation by subscribing 13x FY18F PER. The valuation assigned is in line with its growth prospects of bagging more construction works in the future. The target PE is at the range of upcycle PE for small-and-mid cap contractors amid current booming infrastructure works. Looking forward, we are sanguine on Gadang s earnings which will be underpinned by property unbilled sales of RM 119.1m on top of its sizeable construction order book of RM1.98b. In addition, we are positive with the group s efforts in streamlining its construction operations and optimisation of its resources such as plants, labour, materials for better cost control in its projects handling, as we have witnessed an advancement in its construction s PBT margin for the last 5 quarters. Meanwhile, we are cautiously optimistic on the group s property development segment which focuses on affordable homes that suit the current market appetite as well as its expansion plans for power business which will further boost its recurring income. 2

3 Quarterly performance FYE 31MAY 1QFY18 4QFY17 QoQ 1QFY17 YoY (RMm) (RMm) % chg (RMm) % chg Revenue % % Profit before Tax % % Net Profit % % PBT Margin (%/pts) Net Profit Margin (%/pts) Quarterly segments performance FYE 31MAY 1QFY18 4QFY17 QoQ 1QFY17 YoY (RMm) (RMm) % chg (RMm) % chg Revenue Construction % % Property % % Utility % % Profit before tax Construction % % Property % % Utility % % PBT Margin % % Pts chg % Pts chg Construction Property Utility

4 Financial Summary FYE 31 May (RM'M) FY2013 FY2014 FY2015 FY2016 FY2017 FY2018F FY2019F Revenue % Growth 44.7% 52.9% 7.8% 14.7% -17.8% 36.9% 22.5% Gross profit Gross margin 16.4% 16.7% 21.5% 23.1% 33.8% 23.7% 24.6% Operating Profit Operating Profit margin 9.6% 11.9% 14.9% 19.1% 26.0% 14.5% 15.1% Profits before taxes PBT margin 9.1% 11.6% 14.4% 18.7% 25.6% 16.0% 15.6% Net Income Net margin 5.7% 7.9% 10.1% 14.2% 18.1% 12.1% 11.8% Net Income Growth % 49.0% 111.2% 37.9% 60.6% 4.5% -8.6% 20.2% Payout raio % 14.4% 10.2% 14.5% 12.3% 18.1% 15.0% 15.0% Dividends ROE 7.7% 14.4% 15.4% 17.9% 15.9% 12.9% 13.7% ROA 4.0% 7.4% 7.2% 7.8% 7.0% 6.0% 6.7% Net Gearing Net Cash Net Cash Net Cash Net Cash Net Cash 14.2% 0.7% Per share level EPS (Sen) DPS (Sen) Dividend Yield 0.35% 0.53% 1.03% 1.40% 2.35% 1.63% 1.96% PE (x) NA (RM) EPS (Diluted) DPS (Diluted) Dividend Yield (Diluted) 0.29% 0.44% 0.86% 1.17% 1.80% 1.36% 1.64% PE (Diluted) NA (Diluted)

5 JF APEX SECURITIES BERHAD CONTACT LIST JF APEX SECURITIES BHD 6 th Floor, Menara Apex Off Jalan Semenyih Bukit Mewah Kajang Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) PJ Office: 15 th Floor, Menara Choy Fook On No. 1B, Jalan Yong Shook Lin Petaling Jaya Selangor Darul Ehsan Malaysia General Line: (603) Facsimile: (603) DEALING TEAM Kong Ming Ming (ext 3237) Shirley Chang (ext 3211) Norisam Bojo (ext 3233) Institutional Dealing Team: Lim Teck Seng Fathul Rahman Buyong (ext 741) Ahmad Mansor (ext 744) Zairul Azman (ext 746) PJ Office: Mervyn Wong (ext 363) Azfar Bin Abdul Aziz (Ext 822) Tan Heng Cheong (Ext 111) RESEARCH TEAM Lee Chung Cheng (ext 758) Lee Cherng Wee (ext 759) Low Zy Jing(ext 754) Siau Li Shen (ext 753) Nursuhaiza (ext 752) JF APEX SECURITIES - RESEARCH RECOMMENDATION FRAMEWORK STOCK RECOMMENDATIONS BUY : The stock s total returns* are expected to exceed 10% within the next 12 months. HOLD : The stock s total returns* are expected to be within +10% to 10% within the next 12 months. SELL : The stock s total returns* are expected to be below -10% within the next 12 months. TRADING BUY : The stock s total returns* are expected to exceed 10% within the next 3 months. TRADING SELL : The stock s total returns* are expected to be below -10% within the next 3 months. SECTOR RECOMMENDATIONS OVERWEIGHT : The industry as defined by the analyst is expected to exceed 10% within the next 12 months. MARKETWEIGHT : The industry as defined by the analyst is expected to be within +10% to 10% within the next 12 months. UNDERWEIGHT : The industry as defined by the analyst, is expected to be below -10% within the next 12 months. *capital gain + dividend yield JF APEX SECURITIES BERHAD DISCLAIMER Disclaimer: The report is for internal and private circulation only and shall not be reproduced either in part or otherwise without the prior written consent of JF Apex Securities Berhad. The opinions and information contained herein are based on available data believed to be reliable. It is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered by this report. Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of JF Apex Securities Berhad and are subject to change without notice. JF Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. JF Apex Securities Berhad does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against JF Apex Securities Berhad. JF Apex Securities Berhad may from time to time have an interest in the company mentioned by this report. This report may not be reproduced, copied or circulated without the prior written approval of JF Apex Securities Berhad. Published & Printed By: JF Apex Securities Berhad (47680-X) (A Participating Organisation of Bursa Malaysia Securities Berhad) 5