Gadang sees good returns from power sector venture

Gadang Holdings Bhd, a predominantly construction group is well on its way to beefing up its income base with contributions from its other business divisions.

For starters, it has finally landed a deal in the power business after months of studying opportunities in this area.

Earlier this month, it announced the purchase of a 60% stake in PT Ikhwan Mega Power, an Indonesian hydroelectric utility firm, for 9 billion rupiah (RM3mil). That marks its foray into the power sector.

“We are expecting at least a 15% internal rate of return over a tenure of 30 years.

“This venture will be a steady source of income for us,” says managing director and chief executive officer Tan Sri Kok Onn.

PT Ikhwan Mega Power has a power purchase agreement with PT Perusahaan Listrik Negara, the Indonesian national power company, to develop and supply power from a 9MW mini hydro power plant to be located in Kabupaten Tanah Datar, west Sumatra.

Gadang's concession is for 15 years plus another 15 years renewal, subject to approval.

Currently, about 70% of Gadang's turnover comes from its construction division, followed by property. Utility earnings from its power business are expected to kick in soon.

Under the utility division, Gadang is also involved in the Indonesian water supply sector where via its wholly owned subsidiary, Asian Utilities Pte Ltdhas acquired controlling stakes in five Indonesian water supply companies.

This has proven fruitful for it with the water supply division contributing about 13% to the group's pre-tax profit in the latest fiscal year.

For its construction division, Kok says Gadang's current order book stands at RM1.6bil which should last it for the next three years.

Still, it is actively participating in tenders.

“We have tendered for RM4bil worth of local jobs and expect to get 20% of these by the second half.”

Currently, Gadang is working on the V2 package of Klang Valley Mass Rapid Transit. Valued at RM863mil, the project is the biggest in its order book.

Other works include Shah Alam Hospital project valued at RM410mil and the phase 1 of site preparation work for the proposed Refinery and Petrochemical Intergrated Development (Rapid) project valued at RM312.8mil.

Declining to disclose how much the company can make in general from its contracts, Kok says Gadang has ongoing initiatives that are being directed at lowering and optimising cost structures in order to manage any declining margins for its works.

Industry players however put contract margins in the engineering and construction industry, specifically for jobs obtained from competitive bidding at single-digit.

As for its property division, Kok says the group's current and upcoming projects have a combined gross development value of approximately RM894mil.

The division will focus on these projects located in Kuala Lumpur, Johor and Kedah, which are a mix of commercial and residential, while sourcing for feasible acquisition to beef up its land bank both within and outside Klang Valley, Kok says.

If numbers are anything to go by, Gadang appears to be heading the right way banking on its diversified ventures. It grew its net profit to RM14.8mil in its latest financial year ended May 31,2012 compared to a net loss of RM4.4mil a year ago.

Its revenue for the year however fell to RM246.3mil from RM350.5mil earlier.

For its current financial year ending May 31, Gadang has an internal target of reaching RM300mil in revenue and RM30mil in pre-tax profit. So far up to the nine months to Feb 28, it has generated some RM259mil in revenue and RM26.6mil in pre-tax profit. It will release its fourth quarter results in July.

Gadang's stock which is currently trading at a price earnings ratio of about 5 times finished yesterday 0.5 sen higher to 70 sen.

Earlier this week, research outfit Kenanga Research upgraded the construction sector to a “overweight” from “netural”, saying that this was premised on three investment merits namely, clear order book replenishment visibility as the government will resume all the previous plans under theEconomic Transformation Programme and 10th Malaysia Plan, brighter earnings growth as the order book will continue to progress and risk premium no longer being valid as the GE13 outcome favours contractors.

It expects the construction sector to continue to register robust growth in the medium term and estimates that listed contractors currently have a running order book of RM45bil or more.