KUALA LUMPUR: Gadang Holdings Bhd’s RM680mil contract win is set to boost the construction engineering firm’s outstanding order book and spur earnings for the current financial year ending May 31, 2023 (FY23).
TA Research in a report yesterday said it is raising Gadang’s earnings forecasts for FY23 and FY24 by 2.8% and 4.4%, respectively.
“This is the first major job win for Gadang in FY23 and it helps boost its outstanding order book to about RM1.1bil currently, which is equivalent to three-times FY21’s construction revenue.
“Assuming a gross margin of 8%, the project is estimated to generate RM17mil of net earnings throughout the construction period.”
TA Research added that the new job win has exceeded its order book replenishment assumption of RM600mil for FY23.
“We take this opportunity to reduce the target price-to-earnings multiple for the construction division of Gadang from seven-times to six-times, as we believe the labour shortage issue in the construction sector is unlikely to resolve in the near term.
“Taken together with the revision of earnings forecasts, we tweaked the target price from 38 sen to 35 sen, based on sum-of-parts valuation.”
TA Research is maintaining a “sell” call on the stock.
Gadang announced on Tuesday that it had secured two contracts totalling RM680mil for the Johor Bahru to Singapore Rapid Transit System Link Rail (RTS Link Project).
Gadang said its wholly-owned subsidiary, Gadang Engineering (M) Sdn Bhd, had accepted two letters of award from Adil Permata Sdn Bhd as the sub-contractor in the RTS Link Project.
It said the first contract was for the Bukit Chagar Station and operation control centre (Package 4) at a sub-contract sum of RM370mil.
The second package is for a depot and power supply system (Package 6) at a sub-contract sum of RM310mil.
The duration for both contracts is approximately two years. Gadang said Package 4 and Package 6 are expected to be completed by Sept 30, 2024 and June 30, 2024, respectively.
Gadang said Package 4 and Package 6 are expected to contribute positively to the future earnings of the group.
Gadang reported a net profit of RM5.45mil in its third quarter ended Feb 28, 2022, compared with RM1.53mil in the previous corresponding period, boosted by better profit margins for ongoing projects.
In a filing with Bursa Malaysia on its third quarter earnings performance, Gadang said revenue in the third quarter was lower at RM119.52mil, compared with RM138.91mil a year earlier.
On its prospects going forward, Gadang said its construction division expects gradual improvement in contract flows as Malaysia embraces endemicity with private-sector opportunities and roll-outs of public projects.
“Barring any unforeseen circumstances, the group remains optimistic about the long-term prospects.
“Gadang will continue to enhance productivity with cost optimisation to minimise the negative impact on profitability and liquidity to achieve sustainable growth.”