PETALING JAYA: Gadang Holdings Bhd could face challenges in replenishing its orderbook, having been unsuccessful in securing significant construction contracts for a few years.
TA Securities in a report said Gadang had not bagged a major construction job since August 2017.
“The outstanding construction order book declined to RM700mil from an estimated RM800mil a quarter ago. This translates into a cover ratio of 1.5-times 2019 construction revenue and could provide earnings visibility for the next two years.”
For its property division, TA Securities said the company had recorded property sales of approximately RM120mil in the first half of 2021, compared with RM81mil in the previous corresponding period.
“Property unbilled sales stood at RM124mil as of end-November 2020.”
Meanwhile, JF Apex Securities said Gadang is working hard to buck the trend with the prevailing challenging outlook for its construction and property divisions.
“Currently, the group is bidding for RM3bil worth of construction jobs, mainly consisting infrastructure and public amenities such as government hospitals. In view of the slowdown in the property sector, the group is more inclined to look for government jobs rather than private building jobs on payment concerns.“Overall, Gadang targets to bag between RM300mil and RM500mil worth of jobs for 2021.”
Excluding a fair value loss on investment in quoted shares of RM1.2mil and impairment loss on goodwill of RM1.9mil, TA Securities highlighted that Gadang’s first half 2021 core profit of RM6.9mil came in below expectations, accounting for 23.7% and 20.5% of the research house’s and consensus’ full-year estimates respectively.
“The variance was mainly due to an unexpected loss reported by its construction division.”
Year-on-year, TA Securities said Gadang’s first half 2021 revenue dropped by 17.9% to RM283.5mil, having been negatively impacted by the Covid-19 pandemic.
“First half 2021 core pre-tax profit declined at a faster pace of 77.6% to RM6.9mil, as the construction division sank into the red.
The weaker earnings were dragged down by compliance costs and reduced operating efficiency as a result of more stringent standard operating procedures to curb the Covid-19 pandemic.”
On a sequential basis, TA Securities said the quarterly revenue rebounded by 45.7% to RM168.1mil, mainly due to recovery of revenue reported by Gadang’s construction and property divisions.
“However, the compliance with the Covid-19 standard operating procedures was a drag on the construction division, resulting in the division reporting a pre-tax loss of RM1.8mil in the second quarter of 2021.“This was partially cushioned by improved performance of its property division that saw its pre-tax profit jump 106.6% to RM8.8mil, arising from higher property sales.”
Following the weaker-than-expected results, TA Securities is trimming its construction margin assumptions for various projects and fine-tuning contributions from property projects.
“All in, we cut 2021,2022 and 2023 earnings forecasts by 14.8%, 5.9% and 5.3% respectively.”