Company Results 27 July 2017 Gadang Holdings Berhad Marks earnings of RM100m. Results. Comments

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1 MALAYSIA INVESTMENT RESEARCH REPORT KDN PP13226/04/2013 (032022) JF APEX SECURITIES BERHAD (47680-X) Company Results 27 July 2017 Gadang Holdings Berhad Marks earnings of RM100m BUY Maintained Share Price Target Price RM1.28 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) 1.00 Market cap. (RM m) week price Range(RM) Beta (against KLCI) m Average Daily Volume 3.99m 3-m Average Daily Value^ RM 5.17m Share Performance 1m 3m 12m Absolute (%) Relative (%-pts) Major Shareholders % Meloria Sdn Bhd Sumber Raswira Sdn Bhd Emprovees Providend Fund 2.99 Historical Chart Source: Bloomberg Research Team , ext. 754 zjlow@jfapex.com.my Results Gadang recorded top line of RM163.8m and bottom line of RM30m for its 4QFY17. Quarterly revenue improved by 10.8% qoq but declined by 34.2% yoy, while net profit up 7.5% qoq but slightly down 1.7% yoy. The performance in 4QFY17 was mainly lifted by stellar results in construction amid weak performance in property segment. Above expectations- 12MFY17 net profit of RM103.3m exceeded both ours and consensus forecast for FY17 by 16% and 8% respectively. Comments Construction performance boosted by superior margin Construction segment posted RM89.9m revenue and RM33.8m PBT in 4QFY17 with revenue increased 27.1% qoq but slid 50% yoy. However, PBT surged 30.8% qoq and 7.1% yoy thanks to higher PBT margin, up 4.8 pts qoq and 25.8 pts yoy to 37.6%. Overall, 12MFY17 construction segment s revenue edged down 8.2% yoy to RM275.9m whilst PBT catapulted 60.7% yoy to RM80.8m given PBT margin improved 12.6 pts yoy to 29.3%. We believe the better margin achieved was mainly due to wrap up some of RAPID projects and KVMRT. Construction works underpinned by RM1.5b outstanding order book - The outstanding book will sustain the group s revenue visibility close to 2.7 years or 2.7 times of FY17 revenue. We understand that the group is selectively bidding for new contracts involving Government s infrastructure and building projects with our target orderbook replenishment of RM400m for FY18. Margin squeeze in Property segment despite higher revenue Property segment recorded RM67.8m revenue and RM14.3m PBT in 4QFY17, with revenue increased 30.8% qoq and 7.1% yoy. However, 4QFY17 s PBT dropped 15.5% qoq and 17.9% yoy in view of the slide in margin (-11.6pts qoq and -6.4pts yoy). We believe the lower margin recorded was in line with the group s focus on affordable house. Cumulatively, 12MFY17 property segment revenue soared to RM243.8m with PBT jumped 78.8% yoy to RM63.8m. Overall, property segment saw a dip in PBT margin by 6.4 pts to 26.2%. Please read carefully the important disclosures at end of this publication

2 Property segment unbilled sales stand at RM136.2m - Unbilled sales for the property segment stand at RM136.2m which renders revenue visibility over 0.56 times of FY17 property segmental revenue. We understand that the group achieved new sales close to RM36.3m in 4QFY17, up 21% qoq against RM30m in 4QF17. As such, the group has clinched total new sales of RM147.8m during FY17. Looking forward, we are positive that the group is able to sustain its encouraging new sales in view of the 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 advanced in FY17, expecting further growth in FY18 Utility segment contributed RM32.1m top line in FY17, surged 44% yoy. Similarly, 12MFY17 PBT up 55.2% yoy to RM5.6m. We believe the better performance was attributed by attractive tariff rates which was negotiated by the group earlier. Meanwhile, the group s 9-megawatt mini-hydro power concession PT Ikhwan may start contributing to the group in 4QFY18. Nevertheless, we expect the concession to contribute significantly to the group by mid-2019, upon its full commissioning and running in full capacity. We are positive with the group s decision on exit of plantation business (non-core activity business) and to reallocate its resources to other key businesses within the group. Overall, a net loss of RM1.74m incurred in FY17 as a result of discontinued operation. Earnings Outlook/Revision We tweak up our earnings forecast for FY18F by 3% to RM90.74m following our housekeeping. The earnings forecast in FY18 sees a drop of 11.9% yoy as we believe the earnings momentum tapers off after hitting a peak in FY17. Meanwhile, we introduce our earnings forecast for FY19 which sees a growth of 8.5% yoy. Valuation/Recommendation Maintain BUY on Gadang with a higher target price of RM1.50. (Previously was RM1.47). We derived our valuation by pegging at 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 136.2m on top of its sizeable 2

3 construction order book of RM1.5b. Meanwhile, we are cautiously optimistic with 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 boost its recurring income. Quarterly performance FYE 31MAY 4QFY17 3QFY17 QoQ 4QFY16 YoY 12MFY17 12MFY16 YoY (RMm) (RMm) % chg (RMm) % chg (RMm) (RMm) % chg Revenue % % % Profit before Tax % % % Net Profit % % % PBT Margin (%/pts) Net Profit Margin (%/pts) Quarterly segments performance FYE 31MAY 4QFY17 3QFY17 QoQ 4QFY16 YoY 12MFY17 12MFY16 YoY (RMm) (RMm) % chg (RMm) % chg (RMm) (RMm) % chg Revenue Construction % % % Property % % % Utility % % % Profit before tax Construction % % % Property % % % Utility % % % PBT Margin % % Pts chg % 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% -19.4% 44.9% 7.2% Gross profit Gross margin 16.4% 16.7% 21.5% 23.1% 34.0% 23.4% 24.3% Operating Profit Operating Profit margin 9.6% 11.9% 14.9% 19.1% 26.4% 13.9% 14.7% Profits before taxes PBT margin 9.1% 11.6% 14.4% 18.7% 26.0% 15.2% 15.4% Net Income Net margin 5.7% 7.9% 10.1% 14.2% 19.0% 11.5% 11.7% Net Income Growth % 49.0% 111.2% 37.9% 60.6% 7.6% -11.9% 8.5% Payout raio % 14.4% 10.2% 14.5% 12.3% 17.6% 15.0% 15.0% Dividends ROE 7.7% 14.4% 15.4% 17.9% 16.3% 12.8% 12.4% ROA 4.0% 7.4% 7.2% 7.8% 7.2% 6.2% 6.5% Net Gearing Net Cash Net Cash Net Cash Net Cash Net Cash 13.3% 4.8% Per share level EPS (Sen) DPS (Sen) Dividend Yield 0.35% 0.53% 1.03% 1.40% 2.15% 1.62% 1.75% PE (x) NA (RM) EPS (Diluted) DPS (Diluted) Dividend Yield (Diluted) 0.29% 0.44% 0.86% 1.17% 1.80% 1.35% 1.47% 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) Nazhatul Shaza binti Shukor (ext 755) 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