Case study: Gadang

I read Alex Tan’s article on ROE in which he is not supporting Gadang but Ooi Teik Bee is supporting. Their statements on Gadang in i3investor.com quote

Conclusion :Low PE of below 10 and good 5 years ROE should not be treated as a conclusion to buy a company. Many investors bought Gadang when it was selling at a PE of 8.88 when the share price was RM1.30. Besides, they noticed the ROE was improving. Thus, many rushed in to buy with the expectation that the past performance will repeat itself. Again, I am not saying that Gadang is a bad company. I just think it is involved in construction business which is very cyclical in nature and investors, especially value growth ones, need to think twice before putting your money in.

Ooi Teik Bee
 According to my contractor friend, all contractors of MRT1 (total 8) will get a package of MRT2 project. 6 of them had secured the contract except Gadang and TRC.
Gadang will get one of last 3 packages in 2017 or sooner.
I hope Gadang will not disappoint me.
Please be informed.
Thank you.

11/12/2016 19:33

I am writing this article to share my opinion. Of course, on hind side and looking at the chart, it is easy to see what was the right thing to do. But if you did not do what you should have done, you must sell now before you lose more money.


The above chart shows that the price of Gadang started falling sharply when the company announced its 1st quarter EPS of 6.5 sen on 27th Oct. Many shareholders refused to cut loss and many bought for the bonus shares and warrants and split of shares. But the share price continues to drop on 28th Nov when the new split and bonus shares were listed. It continues to fall every day.

GOD only knows when it will stop falling and reverses its down trend.

There are obviously more sellers than buyers which causes the price to fall. If you were holding some Gadang shares, you should have started selling when the shocking profit was announced on 27th OCT. You should continue selling even when you received the split and bonus shares because you do not know when the trend will reverse so that you can sell at a higher price.

The cut loss policy is good to reduce losses but it is not so easy to execute because some investors cannot overcome their pride and ego to admit their mistakes.

However, they must remember that Gadang will not be able to make more money this year than last financial year basing on the remaining Rm 600 million value of contract works it has and its poor property development business outlook.

Its annual profit for last financial year was Rm 94 million and its 1st quarter profit of Rm 16.7 million. I cannot see how Gadang can make more profit in this current financial year than last financial year.

Many optimistic speculators like to believe Gadang will secure one of the remaining contract packages of the MRT2 project and it can derive sufficient profit to beat its last year’s profit.

From my long experience in the contracting industry, I can say Gadang is very desperate to get some contract works to pay for its fixed operating cost and salary for all its permanent staff. Bearing in mind that Gadang has not been successful in several previous tenders it would have to lower its tender price further in trying to secure one of the three remaining contract packages of the MRT2 project.

Even if Gadang can get one of the remaining contracts and even if it can make profit, the profit will not come in on time for this current financial year.

When Gadang announces its annual profit which will be less than its profit for the last financial year, its price will drop further.

Have you seen the price of any company goes up when the company reports reduced profit?

Final decision is yours

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