Gabungan back on investors’ radar

Azizan: ‘Apart from increasing our order book, we have restructured and improved Gabungan’s corporate governance by bringing more independent directors on board.’

There are positive signs the company’s fortunes are changing under new CEO Azizan

IT was just 12 months ago when construction and property development firm Gabungan AQRS Bhd was looking to find its footing.

The company had reported a loss of RM9.67mil for the financial year ended Dec 31, 2015 (FY15). It had stemmed from construction jobs that were not executed well and sales cancellation of property projects.

Not surprisingly, the company was not on investors’ radar and there wasn’t any analyst coverage.

Then in April 2016, new CEO Datuk Azizan Jaafar took the helm, promising to change the fortunes of the company in an article published by StarBizWeek.

Azizan had said he was putting the company back on track to ensure that it was able to secure and execute impactful projects, for both its property and construction divisions.

Is the company and Azizan delivering on that promise? The signs are in the positive.

Perhaps the most impressive achievement is this: the company has managed to significantly institutionalise its shareholding, moving it up from a negligible percentage to a massive 45% based on its shareholding list dated May 12.

Azizan says that the company needs to be steered on the right path.

Gabungan returned to the black registering a net profit of RM22.63mil in FY16.

Notably, its fourth quarter profits shot up 193% from a year ago, which UBS in a note to clients described as “killer results”.

The increase was mostly due to earnings from its construction outfit. “Apart from increasing our order book, we have restructured and improved Gabungan’s corporate governance by bringing more independent directors on board. We embarked on that move to have more independent directors even before the Securities Commission issued the guidelines to do so,” says a beaming Azizan, adding that Gabungan had won the Malaysian Best Employer Brand Awards 2017 at the 11th Employer Branding Awards ceremony.

To date, Gabungan’s order book and tender book value are at RM1.7bil and RM2bil, respectively.

An analyst points out that Gabungan’s order book of RM1.7bil comes from four construction projects and that are 10 times the total order wins that Gabungan had managed to secure from FY12 to the first quarter of FY16.

Since February, four analyst reports have emerged on Gabungan, two of which have “buy” calls, the other two being non-rated reports.

Gabungan’s shares began to see strong interest since early this year, rising by close to 60% year-to-date.

Its market capitalisation stands at RM546.5mil and its stock is trading at a price earnings multiple of 24.22 times FY16 earnings.

Azizan says that the contracts secured will provide strong earnings visibility for the group over the next three years, on top of the unbilled sales from its property development segment.

Macquarie Research in a March 2 report pointed out that Gabungan was making its property segment more capital expenditure (capex) light by disposing of land and entering into joint ventures with strategic landowners.

“By doing so, Gabungan will spend minimal capex on landbanking and could derive most of its profits from the construction works of the projects it undertakes,” the report says.

Gearing level

One concern of Gabungan has been its gearing level.

As at Dec 31, 2016, Gabungan had a net debt of RM235mil.

Azizan says the target is to reduce gearing from 0.68 to 0.4 this year.

A recent report by MIDF notes that Gabungan’s sale of two parcels of land this year in Damansara Perdana and Kinrara, Selangor, has brought in proceeds of RM55.7mil and RM34.7mil respectively.

“We believe that land sale is part of the degearing exercise and also to fund a larger working capital requirement for the increased construction order book.

“Post land sales, we expect net gearing to come down to 0.42 times,” says MIDF Research.

Meanwhile, Macquarie Research points out that Gabungan should soon conclude the land sale of its Dengkil land as part of its agreement with Perumahan Rakyat 1 Malaysia Corp whereby the latter will build an affordable housing complex on a piece of land owned by Gabungan.

Gabungan was awarded the construction works of the project worth RM314mil, the research house pointed out.

New rail jobs in offing

Investor interest in the company is also stemmed from its potential involvement in mega infrastructure jobs namely the LRT3 and the East Coast Rail Link (ECRL).

“Moving forward, Gabungan is eyeing the LRT3 project and ECRL.

“Given that the ECRL will run across Pahang, which could intersect with its ongoing works at Pusat Pentadbiran Kota Sultan Abdul Shah (SAS), we believe Gabungan stands a high chance in securing a portion of the project.

“We have targeted a replenishment rate of RM700mil for FY17,” says Kenanga Research, which has a fair value price of RM1.51.

Gabungan has successfully pre-qualified and is shortlisted to participate in the tender for the LRT3 project.

It is notable that Gabungan has a strong presence in Pahang and Sabah.

Azizan has strong influence in Pahang as he is a director and shareholder of Tanah Makmur Kota SAS Sdn Bhd with a 10.8% stake.

Tanah Makmur KotaSAS is a subsidiary of Tanah Makmur Bhd, whose major shareholder is the Tengku Mahkota of Pahang.

Tanah Makmur KotaSAS is the developer of Pahang state’s new administrative centre township project in KotaSAS Bandar Baru Kuantan. The administrative centre, touted to be the Putrajaya of Pahang, will take up 26 acres within the 1,500-acre township.

“KotaSAS Bandar Baru Kuantan is the brainchild of the Regent of Pahang, Tengku Abdullah Sultan Ahmad Shah,” says Azizan.

According to the government’s announcement of the finalised alignment of the ECRL, the track will run through KotaSAS Bandar Baru Kuantan.

A Macquarie Research report says that ECRL turnkey contractor China Communications Construction Company (CCCC) may have to work with Gabungan again, if the ECRL alignment passes through Bandar Baru Kuantan.

Gabungan awarded the piling works of its Sungai Besi-Ulu Klang Elevated Expressway (SUKE) package to Econpile and CCCC in a contract worth RM390mil back in December 2016, with CCCC having a 60% share.

Meanwhile, Gabungan has presence in Sabah through a joint venture with Suria Capital Holdings Bhd for the One Jesselton project in Kota Kinabalu, Sabah.

Suria Capital is the only public-listed company owned by the Sabah state government.

In addition, Gabungan owns a 49% stake in pre-cast material supplier Sedco Precast Sdn Bhd, with the remaining 51% held by Sabah Economic Development Corp.

Gabungan stands to be involved in the construction of the Pan Borneo highway, through supplying pre-cast materials and constructing a portion of the highway.

“One of the criteria to be fulfilled before being awarded any Pan Borneo highway contracts is to have a local Sabah partner.

“We will be participating in the tender of the Pan Borneo highway construction since we are already in Sabah, though we are unable to disclose our local partner at the moment. Pan Borneo highway contractors will source pre-cast materials from Sedco Precast as it is the only CIDB-approved Industrialised Building System (IBS) Class A and SIRIM certified company in Sabah,” says Azizan.

Calls for tender of the Sabah portion of the Pan Borneo highway will commence after June, while the contracts will be awarded in the fourth quarter of the year.

Azizan expects enquiries to flow into Sedco Precast, post-award of the Pan Borneo highway contracts.

Sedco Precast’s plant occupies four acres of an 18-acre land in Tuaran, Sabah.

If required, Sedco Precast can easily increase its production capacity to meet the upcoming influx of orders, Azizan notes.

Gabungan has experience in highway construction, having worked on the upgrading of Sungai Gadut highway in Seremban as well as the SUKE highway.

“Generally, states that have potential are Pahang and Sabah because of the state governments’ initiatives in improving infrastructure,” adds Azizan.

Moving forward, Azizan is focused on strengthening Gabungan’s financial standing, to make the company credible and financially prudent with strong corporate governance.

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