Gadang: Earning Took A Heavy Knock

Result Update

For QE31/8/2016, Gadang's net profit dropped by 45% q-o-q or 20% y-o-y to RM17 million while revenue dropped by 58% q-o-q or 30% y-o-y to RM105 million. Gadang recorded lower revenue of RM105 million for the current quarter as compared to RM249 million in the preceding quarter mainly due to completion of various construction projects. In line with this, the Group’s profit before tax decreased from RM38 million in the preceding quarter to RM22 million in the current quarter.


Table 1: Gadang's last 8 quarters' P&L


Table 2: Gadang's segmental results for QE31/8/2016 & QE31/5/2016


Chart 1: Gadang's last 11 quarters' P&L

Valuation

Gadang (closed at RM2.92 last Friday) is now trading at a trailing PER of 8.4x (based on last 4 quarters' EPS of 34.8 sen). At this PER, Gadang is deemed fairly attractive.

Corporate Exercise

On October 7, Gadang announced a share split of 1-to-2; bonus share issue of 1-for4 (after the split) and bonus warrant issue of 1-for-4 (after the split) [here]. We have seen a few of these "massive" exercises in the past 1-2 years and they have generally been well-received by the market.

Technical Outlook

Last Friday, Gadang dropped sharply from RM3.29 to close at RM2.92, after the announcement of the latest quarterly result. Gadang is now hanging onto the 50-day SMA line support. If this support fails, its next support is at the horizontal line at RM2.58.


Chart 2: Gadang's daily chart as at Oct 28, 2016 (Source: Shareinvestor.com)


Chart 3: Gadang's weekly chart as at Oct 28, 2016 (Source: Shareinvestor.com)

Conclusion

Despite the surprisingly weak financial performance, Gadang is rated aHOLD based on fair valuation and positive long-term technical outlook

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.

Gadang: Earnings Continues to Grow

Background

Gadang Holdings Bhd ('Gadang') is involved in 3 main businesses: construction, property development and utility. The contribution by each division is outlined below:


Diagram: Gadang's segmental revenue & profit contribution for FY2015 & FY2016

Historical Financial Performance

Gadang's top-line and bottom-line grew strongly in the past 5 years.


Chart 1: Gadang's P&L for last 10 years

We can see that the growth came mainly from the construction and property development segments.


Chart 2: Gadang's segmental revenue & profit contribution for last 5 years

Recent Financial Results

For QE31/5/2016, Gadang's net profit increased by 21% q-o-q or 24% y-o-y to RM30.5 million while revenue grew by 41% q-o-q or 46% y-o-y to 249 million. Revenue increased q-o-q mainly due to higher progress billings for work done from on-going construction and property development activities. The higher revenue led to higher profits.


Table: Gadang's last 8 quarters' P&L


Chart 3: Gadang's last 10 quarters' P&L

Financial Position

Gadang's financial position as at 31/5/2016 is mixed. Its current ratio is adequate at 2.7x (or at 1.4x excluding property under development) while total liabilities to equity stood at 1.3x. The elevated gearing position is a concern which the company is addressing by raising funds by privately placing out 10% of its share capital (or 23.511 million shares) in April this year. Howevr, it may have to do more capital raising exercise as the gearing ratio is still elevated as at 31/5/2016.

Valuation

Gadang (closed at RM2.48 today) is now trading at a trailing PER of 6.8x (based on last 4 quarters' EPS of 36.42 sen). At this PER, Gadang is deemed fairly attractive.

Technical Outlook

Gadang broke above its long-term downtrend line, RR at RM0.90 in 2013. Its immediate resistance will come from the horizontal line at RM2.50-2.60.


Chart 4: Gadang's monthly chart as at July 22, 2016 (Source: Shareinvestor.com)

Another angle to look at the rise in Gadang;s share price is to draw an irregular upward channel on the price chart. The share price will soon be testing the upper line at RM2.50.


Chart 5: Gadang's monthly chart as at July 22, 2016 (Source: Shareinvestor.com)

Finally, a good way to see the potential of this stock is to place the price chart next to its profit trend. If Gadang can maintain its strong profit growth, its price rally may continue.


Chart 5: Gadang's monthly chart for past 10 years compared to its bottom-lines 

Conclusion

Based on good financial performance, reasonable valuation & positive technical outlook, Gadang could be a good stock for long-term investment.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Gadang.