KUALA LUMPUR, Feb 5 — The management of Gadang Holdings expects the performance for the current financial year to be better than in the previous financial year.
This is due to the sustainable earnings stream from the on-going construction projects, the continuous sales activities generated by the flagship projects of the property division, and the stable earnings from the Indonesian utility operations.
Gadang Holdings is mainly involved in property and construction in Malaysia, and utilities in Indonesia.
It develops property in Malaysia, mainly in the states of Selangor and Johor.
In Indonesia, it owns water treatment plants, and a hydro power concession.
It also owns a palm oil plantation near Ranau, Sabah, which it acquired in 2009 to diversify its earnings.
But its plantation division made up less than 1 per cent of its FY14 revenue.
The company just announced earnings for Q2 FY15:
Revenue: -19 per cent to RM 114.6 million
Profit: +2 per cent to RM 8.5 million
Cash flow from operations: RM 43.7 million vs (RM 13.9 million)
Dividend: 0.0 sen per share vs 0.0 sen per share
Gadang Holdings’ business is mainly made up of its construction division, which contributed almost 80 per cent of H1 FY15 revenue, followed by its property division, which generated about 17 per cent of H1 FY15 revenue.
The management of Gadang Holdings did not explain why the construction division’s revenue went down for the quarter, but it said profit before tax increased marginally due to improved profit margins for various projects.
For its property division, revenue and profit before tax for the current quarter increased year on year mainly due to the changes in accounting estimates for revenue recognition for its Capital City Project.
For its utilities division, revenue and profit before tax for the current quarter decreased mainly due to the disposal of indirect subsidiary PT Sarana Tirta Rejeki on 21 November 2013.
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1. How much does it expect to add to its order book for FY15?
According to a report by The Star on 10 January, Gadang has adopted a cautious outlook for this year.
Tan Sri Kok Onn was quoted as saying: “This year should be tough for the economy and we choose to be conservative and have not yet identified any jobs that we think we can add to our order book or even tender for.”
According to the article, Gadang currently has more than RM 1 billion in construction jobs, made up mainly of jobs at the Refinery and Petrochemical Integrated Development (Rapid) in Pengerang, Johor. These jobs are expected to provide it with earnings visibility for the next two to three years.
So far, the company has tendered for “a few billion ringgit worth of projects”, according to Kok.
What is the minimum amount Gadang Holdings expects to add to its order book in FY15?
Management Reply: Approximately RM100 million.
2. What is the current order book?
Gadang Holdings has disclosed in its FY14 Annual Report that the order book for its construction division stood at RM 1.3 billion, up from RM 1.2 billion in FY13.
In FY12, the construction division’s order book made a big leap to RM 1.6 billion from about RM 500 million in FY11.
What is the current order book value? Management Reply: The outstanding order book as at 31 December 2014 is approximately RM1.1 billion.
What are the latest jobs it has booked? Management Reply: The latest job it booked was the Phase 2 Package 18C site preparation works for RAPID project of RM350 million in June 2014.
What are the jobs that it is bidding for? Management Reply: 1) Design and build for the proposed privatisation of the Kinrara-Damansara Expressway (KIDEX); 2) RAPID Refinery Project Package 3 - Piling works; 3) RAPID Refinery Project Package 3 - Early Works; 4) RAPID Refinery Project Package 3 - Buildings & Civil Works; 5) Haulage Road and Construction of an Access Road outside the RAPID Site for RAPID project.
3. How many units of The Vyne and Bandar Puncak Sena has it sold?
Gadang Holdings’ property division made up about 16 per cent of its revenue in FY14, the second biggest contributor to its revenue, behind its construction division.
As of November, its unbilled sales stood at RM 210 million, which it said will be gradually recognised over the next 2-2.5 years.
It said in its FY14 Annual Report that it had launched the first phase of The Vyne, an integrated project in Salak South, Kuala Lumpur. The project consists of 800 condominium units and 10 units of three-storey shop offices.
According to its FY13 Annual Report, it said it would launch the Bandar Puncak Sena township in Kedah.
But it just said in its FY14 Annual Report that it had a total pipeline with a gross development value of RM 1.7 billion comprising developments in Cyberjaya, the Bandar Puncak Sena township and the remaining phases of The Vyne.
It did not mention Bandar Puncak Sena in all its quarterly financial reports in FY14 either.
Why is it not revealing figures of the sales of its property launches? How much of the first phase of The Vyne has it sold? Management Reply: We have sold approximately 67 per cent of Phase 1 which consist of Block A & B. The unsold units are mainly the bumi units. Phase 2 has recently been launched and sales recorded to date is approximately 45 per cent.
What are sales like at Bandar Puncak Sena? Management Reply: Phase 1A has been launched and sales achieved to date is approximately 40 per cent.
4. What kind of revenue mix is it looking for?
The overarching theme of Gadang Holdings’ expansion into the utility and plantation businesses is to gain a businesses that provide recurring and sustainable income streams – this sentiment has been mentioned in its FY12-FY14 reports.
Its plantation business in Sabah is still far from achieving profitability – it has said it will provide another line of recurring income only from 2017 earliest. But Gadang’s utility business is growing - it acquired its fourth water concession, PT Dewata Bangun Tirta, on 21 July 2014.
The Indonesian company owns a water treatment and supply concession in Kabupaten Gresik, Jawa Timur that can treat 200 litres per second.
It owns the right to water treatment for 25 years starting from February 2013.
Currently, its utility segment contributes just 3 per cent of its total FY14 revenue, with its plantation segment contributing less than 1 per cent.
But these two segments will contribute more as they become stronger.
What is Gadang’s target for their revenue contribution?
Management Reply: For FY2015, utility’s revenue is expected to be at par with FY2014. The new concessions that we acquired shall only contribute positively to the division’s revenue in FY2016. We would expect the division to achieve a revenue of approximately RM20 million in FY2016. In terms of it’s contribution ratio to the group revenue, we would expect it to be still minimum due to the high turnover nature for construction division.
So far we are yet to identify another investment opportunity for Plantation, hence we would expect the contribution from Plantation to be minimum for FY2015 & 2016.
5. Is it holding off on a formal dividend policy?
Gadang ended FY14 with RM 76.2 million in its bank.
Although it was lower than the RM 95.4 million it achieved in FY13, it is seeing a lot more cash in its bank compared to the last five years.
Managing director and CEO Tan Sri Kok Onn told The Star back in 2013 that Gadang is planning to establish a regular dividend policy as it builds up its recurring income assets.
In FY14, Gadang’s dividend payout was 19 per cent, lower than the 29 per cent it paid out in FY13.
Gadang is interested in acquiring more concessions in Indonesia as they are profitable and do not require heavy investment.
More concessions in Indonesia means more steady recurring income, which hedges against the less consistent nature of its construction and property segments.
A formal dividend policy might attract more shareholders, but will it make the trade-off to save the cash for more concession acquisitions in Indonesia?
Or will it dig into its sizeable cash pile to support its dividend payments?
Management Reply: Our management has yet to set a formal dividend policy, the dividend recommendation to the shareholders is on year to year basis, based on its financial performance and cash reserve.
Based on our Quarter 2, FY2015 announcement, the cash reserve has doubled to approximately RM154 million, which is more than comfortable to meet its dividend payment and fund its equity contribution for the utility projects.
6. Has it managed to get the capacity of its water concession increased?
According to JF Apex Research, Gadang derives all its recurring income from its utility division, in which it treats 880 liters per second (lps) of water through its three concessionaires in Indonesia. It is currently in negotiations to increase the capacity to 1,250 lps.
Greater capacity means more water treated, which will result in higher revenue.
This was back in November 2013.
We have yet to hear any news or announcements on whether this has been successful.
Where are things at now with negotiations?
Management Reply: We have completed the acquisition of 60 per cent shareholding in PT Ikhwan Mega Power (IMP) in June 2014. IMP is the the holder of a 9 Megawatt mini hydro power concession in Kabupaten Tanah Datar, Sumatera Barat for a period of 15 years. The construction of the hydro power plant is expected to complete by year 2016. Upon full commissioning, IMP is expected to generate a yearly revenue of approx Rp56 billion.
In Nov 14, we have completed the acquisition of 70 per cent shareholding in PT Dewata Bangun Tirta (DBT). DBT is the concessionaire for 200 lps water treatment and supply in Kabupaten Gresik, Jawa Timur for a period of 25 years commencing Feb 2013. Yearly turnover for DBT is approximately Rp20 billion. We are now in the process of acquiring the remaining shareholding in DBT.
Currently, we are actively pursuing a 4 Megawatt mini hydro power concession project in Jawa Barat..
7. Is it going to enter the construction and property industries in Indonesia?
With Gadang having a presence in Indonesia and making money from its concessions, has it considered expanding beyond Malaysia into Indonesia for its construction and property development businesses?
Management Reply: The management do not have the intention to enter into the construction and property industries in Indonesia in the near future.
8. Will construction materials become pricier due to weakening Ringgit?
How much of their construction materials does Gadang import?
How will the cost of the materials be affected by the weakening Ringgit?
Management Reply: We do not import construction materials from overseas, we source it from the local suppliers.
For our current biggest construction project - Rapid earthworks, the major construction materials we need are diesel and sand. The recent price drop in diesel price is in fact help to improve our project profit margin. We do not foresee sand price to be affected by the weakening Ringgit.
We thank Kok Pei Ling, Chief Financial Officer, Executive Director and member of risk management committee, for her response.
