High-Rise Specialist NOT RATED. Ace Market Listing I P O

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1 I P O Friday, March 09, 2018 FBMKLCI: 1, Sector: Construction THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* GDB Holdings Berhad TP: RM0.545 (+55.7%) High-Rise Specialist Ace Market Listing NOT RATED Ooi Beng Hooi Tel: benghooi@ta.com.my Background GDB Holdings Berhad (GDB) is a building contractor, providing construction services mainly for high rise residential, commercial and mixed development buildings. IPO Statistic The IPO entails a public issue of 125.0mn new ordinary shares, and an offer for sale of 37.5mn shares by the offeror to identified investors, at an IPO price of RM0.35/share. Public issue: 12.5mn new shares for application by the Malaysian public; 15.0mn new shares for application by eligible directors, employees and persons; 25.6mn new shares by way of private placement to identified investors; 71.9mn new shares by way of private placement to Bumiputera Investors approved by MITI. Main Competitive Advantages 1) Experienced and technically strong management team with proven track record; and 2) Investment in technology to improve efficiency and enhance its business growth. Valuation At an IPO price of RM0.35/share, GDB is trading at a trailing PER of 9.1x FY17 annualised earnings. We value the company at 12x CY18 EPS, arriving at a fair value of RM0.545/share. Not Rated. Earnings Summary (RM mn) FYE Dec FY15 FY16 FY17F FY18F FY19F R evenue (LHS ) Gros s profit E BITDA E BITDA m a rg in (% ) Opera ting profit P BT Core profit (LHS ) E P S * (s en) P E R ^ Gros s dividend (s en) na na Dividend yield^ na na R OE (% ) Note: *based on enlarged share base of 625mn, ^ based on IPO price of RM0.35/share Share Information Listing Ace Market Enlarged Share Capital (mn) Market RM0.35 (RM mn) Issue price (RM) 0.35 Oversubscription rate N/A Estimated free float (%) 26.0 Tentative listing date 27 March 2018 Tentative Listing Dates Event Tentative Date Opening of the IPO 5 March 2018 Closing of the IPO 12 March 2018 Balloting of Applications 14 March 2018 Allotment of Shares 26 March 2018 Listing 27 March 2018 Ratio & Analysis NTA p e r sh a re (p ost IPO) (RM) 0.13 Price to NTA (x) 2.69 Prof orm a ROE (% ) 30.7 Prof orm a ROA (% ) 13.4 Prof orm a Ge a rin g (x) n e t ca sh Utilisation of Proceeds RM(mn) % Ca p e x - Pu rch a se of m a ch in e ry Acq u isition of n e w of f ice Acq u isition of la n d f o r stora g Workin g cap ital Estim a ted listin g e xp e n se s TOTAL Page 1 of 9

2 9-Mar-18 Business Overview GDB is a building contractor, which provides construction services for high rise residential, commercial and mixed development buildings. IPO Structure Exhibit 1: IPO Structure Public Issue Malaysian public Eligible directors, employees and persons Private placement to identified investors Private placement to identified Bumiputera investors approved by MITI Offer of Sale Private placement to identified investors Source: Company, TA Securities 12.5mn new shares, of which at least 50% is set aside for Bumiputera investors. 15.0mn new shares 25.6mn new shares 71.9mn new shares 37.5mn vendor shares Utilisation of proceeds The estimated gross proceeds of RM43.8mn raised are expected to be utilised for the followings: Exhibit 2: Utilisation of proceeds Des cription Estimated timeframe for utilisation from Date of Lis ting Amount (RM'mn) % of Total Gross Proceeds Cap e x - Pu rch a se of n e w m a ch in e ry a n d e q u ip m e n t With in 36 m on th s Acq u isition of a n e w of f ice With in 36 m on th s Acq u isition of la n d f or storag e With in 12 m on th s Workin g Ca p ita l With in 12 m on th s - Pa y m e n t to su p p lie rs a n d su b con tra ctors With in 12 m on th s Pa y m e n t of sa la rie s f or n e w e m p loye e s With in 12 m on th s Estim a ted listin g e xp e n se s With in 2 m on th s Source: Company, TA Securities Key Competitive Advantages 1) Experienced and technically strong management team with proven track record Both the Managing Director, Mr. Cheah Ham Cheia and Executive Director, Mr. Alexander Lo Tzone Leong have 39 years and 26 years of relevant working experience respectively in the construction industry. Since the commencement of the business in May 2013, all the 4 projects delivered to clients thus far were completed ahead of schedule. Page 2 of 9

3 Exhibit 3: Days ahead of contractual completion date by projects Project Project Duration (months) Days ahead of contractual completion date KL Eco City Project 1 - Section 1 - Part of Section 2A - Balance of Section 2A and Section 2B BBCC Project 2 3 One Central Park Project KL Eco City Project Source: Company, TA Research 9-Mar-18 As a testament to its quality and safety commitment, GDB has obtained the following certifications and achievements: - ISO 9001: 2015 Quality Management System; - QLASSIC; - CONQUAS; - BQUAS; - OHSAS 18001: 2007 Occupational Health & Safety Management System; - SHASSIC; - Anugerah COMBI Tapak Binaan 2017; - ISO 14001: 2015 Environmental Management System; - 5-S standard certification; and - Green 5S Program certification. Another value proposition of the company is its capability in reviewing its clients designs and the ability to provide value engineering and/ or propose a construction methodology that improves works efficiency. These expertise and value added offerings would benefit their clients by: 1) reducing the construction period, and/ or 2) enhance opportunities for cost savings. 2) Investment in technology to improve efficiency and enhance its business growth While the company is relatively young versus other established building contractors, it has already adopted the Building Information Modelling (BIM) software, which enables integration of key building elements into a building design and stimulates the scheduling, estimation and fabrication process. This application of BIM detects and avoids clashes of building components, thus eliminating wastage of time and rectification costs. The application of the software is also an advantage in project tenders. Key Risks Relating to the Business and Industry 1) Continuity of order book is not assured The company secures contracts on a project basis. There is no assurance of continuity from one project to another. In the event the company is not able to secure sufficient contracts to sustain revenues, any significant drop in its order book would adversely affect the financial performance of the group. 2) Fluctuations in the prices and shortages of construction materials Its key construction materials include steel, ready-mixed concrete, sanitary wares, tiles, cement, grout and adhesive, timber and plywood. These materials are price sensitive. Any price volatility and shortages of these materials could result in increased costs and have an adverse effect on its financial performance. Page 3 of 9

4 9-Mar-18 3) Dependent on the Malaysian property sector GDB s business operations are dependent on the performance of the Malaysian property sector. A slowdown in the local property sector could have a direct impact on the financial performance of the company. 4) Dependent on foreign workers The group s operations are dependent on the supply of foreign workers. Any shortage in labour supply could adversely affect its business operations and financial performance. Financial Highlight The group commenced business in May Coming from a small base, the group experienced significant jumps in revenue by 95.7% and 63.3% to RM169.5mn and RM276.9mn in FY15 and FY16 respectively. The historical FY14/FY15/FY16 PBT margins improved progressively from 4.5% and 5.7% to 7.7% respectively. Margin improvement for FY15 and FY16 came from economies of scale in administrative expenses. The stronger margin recorded in FY16 was due to an additional boost by lower-thanexpected costs for construction materials, as well as early completion of the One Central Park project. This resulted in savings for preliminaries such as site management cost, utilities, rental expense of machinery and other maintenance and overhead expenses. Exhibit 6: Financial performance Source: Company, TA Securities We forecast revenue to grow by 20.0%, 9.4% and 3.5% in FY17, FY18 and FY19 respectively. This is backed by an outstanding order book of RM854.9mn as of 6 March 2018 and our new job assumptions of RM400mn each year for FY18 and FY19 respectively. We expect GDB to achieve PBT margin of 11.4% for FY17, backed by lowerthan-expected costs for construction materials, as well as early completion of One Central Park project, which results in savings for preliminaries such as site management cost, utilities, rental expense of machinery and other maintenance and overhead expenses. Going forward we assume PBT margin to normalise to 9.5% for FY18 and FY19 respectively. Driven by robust revenue growths, we forecast the group to achieve strong core profit growths of 68.9%, 18.3% and 40.6% to RM24.1mn, RM28.5mn and RM40.0mn in FY17/18/19 respectively. Page 4 of 9

5 While the company is seeking to list on the Ace market, we observe that the company has already fulfilled the profit test requirement for main market listing, i.e. an uninterrupted profit of 3 to 5 full financial years based on audited financial statements, with an aggregate after-tax profit of at least RM20mn and an after-tax profit for the most recent financial year of at least RM6mn. 9-Mar-18 Future Plans and Business Strategies The group s future plans and business strategies are as follows: i) Growing presence in high-rise construction GDB plans to grow order book through new high-rise residential, commercial and mixed development contracts. To achieve this, the group is investing in 4 tower cranes, 4 passenger hoists and 2 concrete placing booms. The investment in machinery and equipment will enable the group to have better control and flexibility in deploying machinery and equipment, to increase its operational efficiency, and to enhance its competitiveness to tender for new projects; ii) To expand to other building segments Leveraging on its construction expertise in high-rise buildings, the group aims to branch out into other building segments such as hospitals, universities, hotels, convention centers and shopping malls; and iii) To enter into civil and infrastructure construction The management has previous experience from past employments to manage civil and infra projects. It is sourcing personnel to form a project team for civil engineering projects within 12 months from listing. It is eyeing roads, bridges and marine works in the initial stage. Outlook As of 6 February 2018, the group has an outstanding order book of RM854.9mn, translating into 3.0x FY17 annualised revenue. This would provide earnings visibility to the group till Its outstanding order book is as follows: Exhibit 6: Breakdown of outstanding order book Project Expected completion date Outstanding amount (RM mn) Westside III Project December Etiqa Project July SPB Project August Menara Hap Seng 3 Project Dec TOTAL While the sentiment in the property market is rather cautious at the moment, we are of the view that prospects for GDB remains bright given: i) its relatively small base; ii) expansion into other building segments; iii) gradual improvement in demand for property in the Klang Valley following the rollout of various rail projects (MRT Line 2, LRT Line 3, MRT Line 3, East Coast Rail Line and KL-Singapore High Speed Rail); and iv) escalating land cost due to land scarcity, which would lead to an increased demand for high-rise buildings in the Klang Valley. This should benefit high-rise buildings contractors such as GDB. Balance Sheet On pro forma basis, the company has zero borrowings with a net cash position of RM48.4mn or 7.7sen/share post listing and utilisation of IPO proceeds. This translate into 22.1% of its market cap, based on IPO price of 35sen/share. Page 5 of 9

6 9-Mar-18 Dividend Policy The Directors intend to adopt a policy of recommending up to 30% of the net profit in each financial year to be distributed as dividends. Earnings Forecast We expect earnings growths of 68.9%, 18.3% and 40.6% for FY17, FY18 and FY19 respectively. Our earnings projections are premised upon the following assumptions: Revenue growth of 4.3%, 38.3% and 40.6% for FY17, FY18 and FY19 respectively, backed by an outstanding order book of RM854.9mn as of 6 February 2018; Order book replenishment assumptions of RM400mn/year for FY18 and FY19; and Operating margins of 11.3%, 9.5% and 9.5% for FY17, FY18 and FY19 respectively. Valuation We assign a target PE multiple of 12x to GDB and arrive at a target price of RM This is considering: i) the company is a small-cap company; ii) the company has a strong balance with zero borrowing and a net cash position of RM48.4mn or 7.7sen/share on pro forma basis post IPO and utilisation of IPO proceeds; iii) solid technical capabilities, which include the adoption of BIM and proven track record in terms of quality and timeliness; and iv) strong earnings growths projected for FY18 and FY19. Peer Comparison Share Price Market Cap Core EPS PE P/B ROE Net Debt/Equity Dividend yield (RM) (RM'mn) (sen) (x) (x) (%) (%) (%) KE RJ AYA* net ca s h 1.6 INTA* net ca s h 0.0 AVE RAGE GDB^ net ca s h na Note: * B as ed on Dec 17 res ults ; ^ bas ed on annualis ed 10MF Y 17 res ults and pro-forma balance s heet APPENDIX Exhibit 8: Completed projects Page 6 of 9

7 Page 7 of 9 9-Mar-18

8 Exhibit 9: Ongoing projects 9-Mar-18 Page 8 of 9

9 9-Mar-18 Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Friday, March 09, 2018, the analyst, Ooi Beng Hooi, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee Kuala Lumpur Malaysia Tel: Fax: Page 9 of 9