Review

• Excluding an extraordinary gain of RM7.0mn, GADANG’s 9MFY24 core earnings of RM7.1mn (+11.6% YoY) came in below our expectations, accounting for only 42.3% of our full-year estimates. The negative variance was largely due to: (i) slower-than-expected work progress in the construction division, and (ii) higher-than-expected operating costs in both the construction and utilities divisions.

• YoY, GADANG’s 9MFY24 registered a revenue growth of 13.3% to RM433.1mn, thanks to better sales and improved work progress in the property division, albeit partly offset by the decline in the construction division due to the completion of certain projects in the previous corresponding period. However, GADANG’s core PBT decreased to RM12.7mn (-26.7% YoY), owing to higher project operating costs incurred in both the construction and utilities divisions.

• QoQ, 3QFY24’s revenue and core PBT declined 13.1% and 26.7% to RM141.2mn and RM1.7mn, respectively, owing to lower construction work progress coupled with higher sales of completed properties in the preceding quarter.

Impact

• Considering the weaker-than-expected results, we have adjusted our progress billing and margin assumptions for certain ongoing projects. In addition, we also cut our new order book replenishment assumptions for FY24/25/26F to RM150mn/RM500mn/RM500mn from RM600mn/annum, respectively, as the group has yet to secure any new jobs in FY24. As a result, our earnings estimates for FY24/25/26F are revised downward by 41.2%/20.8%/15.3%, respectively.

Outlook

• As of end-Feb 2024, the group's construction order book and unbilled property sales reached RM1.0bn and RM250mn, respectively, indicating a promising earnings outlook for the next two years. Notably, the property division is anticipated to emerge as the primary earnings driver, propelled by attractive sales package incentives. However, the slow order book replenishment for the construction division remains a near-term concern.

Valuation

• Following the earnings revision, we lower our SOP-derived target price to RM0.22 (from RM0.23) after rolling forward our valuation base year to CY25 earnings. Maintain Sell.

Source: TA Research - 23 Apr 2024