Gadang looking steady after disposal of plantation
Lim Cian Yai 
Kok says exit decision made after portfolio review

Having exited the plantation business and armed with cash, Gadang Holdings Bhd’s shareholders are elated that the company is going to focus solely on its core businesses – construction, property development and utilities – once again.

Gadang’s timing couldn’t have been better as things are looking up for the construction sector. Moreover, the company has a healthy order book of RM1.98 bil, which will keep it busy for the next three to four years. Between March and August alone, it bagged contracts worth a total of RM1.7 bil, which is a remarkable performance indeed.

Among the big projects under its belt is the Mass Rapid Transit 2 (MRT2) project worth RM958.08 mil, which was awarded in March. Gadang’s task will be to construct and complete a viaduct guideway and other associated works from Serdang Jaya to Universiti Putra Malaysia.

Then in May, its 51% subsidiary Gadang CRFG Consortium Sdn Bhd, was awarded another contract by TRX City Sdn Bhd, for traffic and road upgrading works along Jalan Tun Razak in Kuala Lumpur. In August, the company continued to impress when its unit, Gadang Engineering (M) Sdn Bhd, won a RM475 mil job from Cyberview Sdn Bhd to build a 288-bed hospital in Cyberjaya.

With the number of project wins, the company is optimistic that its near-term outlook remains good. “We anticipate FY18’s performance to remain satisfactory,” says Gadang’s executive director Kok Pei Ling in response to FocusM’s queries. According to her, the company will now be focusing on executing the projects it won.

The idea to diversify into plantations was mooted in 2009 when the company saw oil palm as a resilient industry. The initial plan was to develop the plantation subsidiary, Desiran Impian Sdn Bhd (DISB), to be one of its core businesses, providing a steady income stream.

The plantation sector is not without its fair share of risks and volatility. The price of crude palm oil is beyond the fundamental demand and supply mechanics, as the market is highly speculative.

Over the years, Gadang has invested about RM18 mil in the plantation business. Unfortunately, despite the efforts, DISB has not delivered positive returns.

Instead, the plantation division piled up RM10.8 mil of losses since 2009. The worst performance was a pre-tax loss of RM2.95 mil on the back of RM2.67 mil revenue in FY17. DISB’s poor performance meant that more resources were needed to keep it afloat. 

Perhaps, this was the straw that broke the camel’s back. Gadang then decided to hive off DISB.

According to Kok, the group “strategically decided to exit the plantation business” following the company’s portfolio review in the financial year ended May 31, 2017.

“Oil palm plantation requires sizeable land size to achieve economies of scale. When we ventured into plantations, our original target was to achieve a plantation development size of 10,000ha,” says Kok.

“However, we have not been able to increase the land available for planting.”

Hence, Gadang’s shareholders lauded the exiting of the plantation business as some feel the company may have neglected its core businesses. “It is natural that when you have a variety of businesses to focus on, there will be a tendency to unintentionally neglect or marginalise one or the other,” says a shareholder.

Gadang had sold wholly-owned subsidiary DISB for RM15 mil to Kumpulan Sawit Tan Sdn Bhd in July. The disposal freed up the company’s capital commitment, enabling it to channel more resources to its other key businesses. The sale also marked the end of the company’s eight-year affair with the plantation sector.

Gadang’s construction segment is the main revenue earner for the group. For FY17, the segment’s pre-tax profit margin almost doubled to 28.97% from 14.87% in FY16. However, revenue declined sharply by 40.4% to RM288.62 mil in FY17 from RM480.6 mil in the previous year.

Gadang now wants to grow its utility segment as it could potentially generate recurring income. The company manages four water treatment plants in Indonesia. In FY17, topline contribution from the segment increased by 10% year-on-year to RM23.1 mil, mainly due to water tariff rate adjustment.


Upside in utility sector

The company opines that long-term growth potential for Indonesia remains strong, on account of underdeveloped water infrastructure to support the expansion network of portable water to a wider population. That could spell an upside for Gadang in the water sector, provided that it manages to sustain and grow its performance.

In addition, Gadang also has a power generation unit with two hydro plants and a 5.9MWac solar power plant which is still under construction. The hydro power plants are located in Indonesia while the solar power plant is in Kota Marudu, Sabah. When fully commissioned, the hydro power plants can generate a combined 13MW of electricity.

One of the hydro power plants is expected to be commissioned by FY18 and the solar power plant by FY19.

Gadang’s Solar Power Purchase Agreement (SPPA) negotiations with Sabah Electricity Sdn Bhd were concluded in May. The company is now in the midst of sealing a power purchase agreement (PPA) with Indonesia’s state-owned utility firm Pembangkit Listrik Negara for its 4MW Cirompang Mekamurti Minihydro Power project in Java.

Application and negotiation processes for the PPA have been concluded, with signing expected “within the next few months”.

The existing permit also allows Gadang to scale up the generating capacity of the 4MW hydro plant in Java to 12MW. Nevertheless, no firm decision has been made as Gadang is still exploring and evaluating this option.

This article first appeared in Focus Malaysia Issue 260.