Estimation of Future Earnings (Gadang)

I believe most of the investors knew that announcement of quarterly result is often a catalyst to move share price. If the profit is good, the share price will go up but if the profit is not good the price will likely come down. But, how are we going to determine and estimate whether a company upcoming profit is good? Normally, it is very hard to tell especially company without contracts. So, construction companies are the best illustration to estimate its future earnings as they will disclose their awarded contracts.

As an example, let’s have a look at Gadang Holdings Berhad. Currently, Gadang had three major sources of income which are from Capital City Project, Rapid Contract and Knowledge-Workers Housing Project. 

Rapid Contract

On June 2014, Gadang accepted the Letter of Award ("LOA") from PETRONAS Refinery and Petrochemical Corporation Sdn Bhd for the award of contract known as "Provision of Phase 2 Site Preparation Works for the Proposed Refinery and Petrochemical Integrated Development (RAPID) Project - Package 18C" ("the Contract") for the total estimated provisional contract price of RM350 million.

The Contract shall commence from the date of the LOA and is expected to be completed by 30 September 2015.

Estimated amount, RM	350,000,000
Commencement date	June 2014
Expected completion date	September 2015
Quarter	5
Net profit margin	85%
Estimated net income, RM	52,500,000
Profit after tax, RM	39,375,000
PAT per quarter, RM	7,875,000

I am using 15% net profit margin for provision service. Based on the above calculation, Gadang will get RM7.875m profit for 5 quarters theoretically.

Knowledge-Workers Housing Project

On May 2014, Gadang entered into joint development agreement with Cyberview Sdn Bhd (“CSB”) to undertake the proposed development of Knowledge-Workers Housing Project at Block 20, Cyberjaya.

It had an estimated GDV of approximately RM1.055 billion comprising:

(a) 2,500 housing units (inclusive of 150 units of the Government Quarters and 794 units of PR1MA apartment units); and

(b) commercial development with a plot ratio of 1 : 2 on a plot of land measuring 10.44 acres

Gadang shall be solely responsible to carry out, implement and develop the Proposed Development, while CSB will only provide the land.

The Proposed Development is expected to commence by 1st quarter of year 2015 and expected to complete by 2nd quarter of year 2023.

Gadang shall pay to Cyberview a fixed guaranteed amount of RM168.4 million as Cyberview’s entitlement. In addition to the guaranteed amount, Gadang shall pay to Cyberview a profit sharing equivalent to 1.67% of the net sales revenue achieved for each respective phase of the Proposed Development.

		No. of house	Amount
Average PR1MA house cost, RM	250,000	794	198,500,000
Average housing cost, RM	600,000	1,556	933,600,000
Government Quarters cost, RM	300,000	150	45,000,000
Estimated GDV, RM			1,177,100,000
Risk adverse condition		80%	941,680,000
CSB entitled amount, RM		1.67%	(19,883,688)
CSB guaranteed amount, RM			(168,400,000)
Estimated Gadang gross income, RM			753,396,312
Operating expenses margin		85%	(640,386,865)
Estimated Gadang net income, RM			113,009,447
Tax expenses		25%	(28,252,362)
Profit after tax, RM			84,757,085
Quarter			34
PAT per quarter,RM			2,492,855

Based on research, the average cost for housing in Cyberjaya is as above. Even though the given GDV is RM1.055b, but I ramp it up to RM1.177b by logically. However, the sold out rate will hardly reach 100%. So, I add in the risk adverse condition of 80%, which means I only take 80% of the GDV into account only. As a result, RM2.49m will be contributed to Gadang’s net profit for 34 quarters.

Capital City Project

On 26 December 2013, Gadang entered into the agreement with Capital City Property Sdn Bhd (“CCPSB”) for the proposed development and construction of an integrated development in Johor.

Details:

•         Retail podium of 10 levels of retail and car park
•         Three tower blocks of office comprising 15 levels of office
•         Two tower blocks of hotel suites comprising 15 floors each

It had an estimated GDV of approximately RM1.8 billion.

CCPSB shall be solely responsible to carry out, implement and develop the Proposed Development, while Gadang will only provide the land.

The Proposed Development is expected to commence by April 2014 and shall be complete not later than 66 months, which is equivalent to 22 quarters.

CCPSB shall pay Gadang a total value equivalent to 16.7% of the final GDV of the project up to a maximum sum of RM324m.

Estimated GDV, RM		2,000,000,000
Risk adverse condition	80%	1,600,000,000
Gadang entitled amount	16.70%	267,200,000
Profit after tax, RM	25%	200,400,000
Quarter	22
PAT per quarter	9,109,091

I ramp up the estimated GDV up to RM2b since normally the final GDV of a construction project will likely to be increase. The risk adverse condition of 80% had been added in as well. As a result, theoretically, RM9.1m will contribute to Gadang net profit for 22 quarters.

Overall, the profits which likely contribute from this three projects are RM20.5m for the coming quarters.

As above, we can see that Gadang FY15Q4 net profit was RM24.5m, which was higher than my forecast profit. On the next quarter, Gadang’s net profit will still expected to have at least RM20.5m. However, the quarter after that will likely to be affected since Rapid project will be completed by 30 September 2015.

As a conclusion, by using forecast, we can roughly estimate the potential earning of a company and it will definitely boost up our confidence to the particular company!

Just for sharing.