This article first appeared in The Edge Financial Daily on January 19, 2018

Kejuruteraan Asastera Bhd
(Jan 18, 28 sen)
Initiate buy with a target price (TP) of 37.5 sen: As an engineering services provider, Kejuruteraan Asastera Bhd (KAB) has an asset-light business model. It has a net carrying amount of RM7.4 million for its property, plants and equipment, with a majority of the amount, RM6.1 million, comprising land and buildings. Meanwhile, furniture, fittings and equipment carry a mere book value of RM351,000. This allows the company to expand more swiftly, compared to businesses that require heavy investment in plants and equipment. 

Besides, the business does not necessitate the company to stock up inventory. It has zero inventory as of end-2015, end-2016 and end-September 2017. This eliminates the risk of obsolete inventory and dead stock. 

Given the above, the group was able to generate exceptional return on equity (ROE) of 51.4% and 49% for financial year 2015 (FY15) and FY16 respectively. Although we anticipate ROE to be diluted by increases in shareholders’ equities following the listing of the company in November 2017, we forecast that the company should still achieve ROE in excess of 20% for FY17, FY18 and FY19, compared with average ROE of 13.3% and 12.3% for FY18 and FY19 forecast for the construction stocks under our coverage (excluding KAB). 

KAB has been a nominated subcontractor for some two-thirds of the total number of projects secured in the recent years. Being a nominated subcontractor allows the company to have direct negotiation with project owners on the terms of the subcontracts. Therefore, it is less competitive as compared with a public tender, and hence, could command better margins. 

It has secured works for development projects by well-known developers such as Mah Sing, Binastra, Mitraland, Titijaya Land, Mayland, Ekovest and Metro Kajang. A majority of the contracts are on a negotiated basis. 

Besides, unlike domestic subcontractors that receive payments from main contractors, being a nominated subcontractor, KAB usually receives payments directly from developers, instead of going through the main contractors in the payment flow. This reduces collection risk arising from non-performance of the main contractors. 

The company has a low capital expenditure (capex) requirement, as it is an engineering service provider with an asset-light business model. For the period of three years between FY14 and FY16, it had spent a total of RM6.9 million in capex, of which RM4.4 million went to acquisition of land and buildings. This was followed by RM2.2 million on motor vehicles, while the remaining, only RM400,000, was spent on furniture, fittings and equipment for a period of three years. 

On a pro-forma basis (based on initial public offering [IPO] prospectuses), after the IPO and utilisation of IPO proceeds, the company would be in a net cash position of RM14.4 million, translating into 16.4% of its current market capitalisation, or 4.5 sen per share.

We observe that other than KAB, a majority of listed companies on Bursa Malaysia with mechanical and electrical engineering services as their core business were loss-making. As such, comparisons were made against construction/engineering companies with a net cash position, such as Sunway Construction Group Bhd, Kerjaya Prospek Group Bhd, Pintaras Jaya Berhad and Inta Bina Group Bhd. We assign a target price-earnings multiple of 12 times to KAB and arrive at a TP of 37.5 sen. This is considering its asset-light business model; the company is a small-cap company; its net cash position; and the headwinds currently faced by the property sector, which may affect the job flow for building construction, but supported by affordable housing and social amenities projects. — TA Securities, Jan 18