GDB announced that it has filed a litigation proceeding against KSK Land to recover an unpaid sum of RM120.7m from the 8 Conlay project. This litigation is likely a last resort option. We are negative on this development due to: (i) sum is 20% higher than our estimate; (ii) amount and timing of recovery is uncertain; (iii) potential impairment and (iv) possible working capital squeeze. Cut FY22/23/24 earnings forecasts by -32.4%/-53.9%/-84.1% after removing 8 Conlay from its orderbook and removing replenishment assumptions for FY23. Maintain SELL with lower TP of RM0.10. Upside risk to call: resolution to developer’s funding issues.

NEWSBREAK

GDB announced that its wholly owned subsidiary has filed a writ of summons and a statement of claim at the high court against KSK Land Sdn Bhd for an unpaid amount of RM120.7m. While the developer of 8 Conlay project is Damai City Sdn Bhd, KSK Land is implicated as the holding company and having executed a corporate guarantee in favour of GDB.

HLIB’S VIEW

No amicable solution. In an earlier announcement, GDB had prioritised an “amicable solution” which now appears futile, giving rise to this lawsuit as a last resort. We view this development negatively due to: (i) unpaid sum of RM120.7m is 20% higher than our initial estimate; (ii) uncertain recoverable amount from KSK; (iii) lawsuit could be long drawn; (iv) potential working capital squeeze and (v) possible impairment of the entire sum. For illustration, GDB’s shareholders funds could decline to ~RM64m (from RM155.5m as of 30-June-22) if there is a full impairment of the disputed amount (assuming tax effect).

Background. The 8 Conlay project is approximately 75% of GDB’s outstanding orderbook. GDB had suspended works at the site on 16 Aug-22 as announced on Bursa. This we believe would have taken effect after serving a 14 day notice to Damai City prior to the effective date. The 8 Conlay project, located in Jalan Conlay carries a GDV of RM5.4bn featuring two towers of branded residences and one hotel. Based on news reports, tower A of the residential component achieved a take up rate of 80% while tower B’s is at 40% as of mid-2022. Foreign buyers make up 60-70% sales and the pandemic could have significantly affected sales progress. In our view, considering the project’s prime location, a white knight could still emerge going forward.

Forecast. Cut FY22/23/24 earnings forecasts by -32.4%/-53.9%/-84.1% after removing 8 Conlay from orderbook and removing replenishment assumptions for FY23.

Maintain SELL, TP: RM0.10. Maintain SELL with a lower TP of RM0.10 (from RM0.15) post earnings cut. Our TP is based on tagging FY22 EPS to a P/E multiple of 6.0x. We think a target P/E multiple of 6.0x is fair as it is in-line with other small cap construction stocks under coverage. Upside risk to call: resolution to developer’s funding issues.

Source: Hong Leong Investment Bank Research - 11 Oct 2022