This article first appeared in The Edge Financial Daily on January 13, 2020
Kejuruteraan Asastera Bhd
(Jan 10, RM1.41)
Maintain sell with a lower target price (TP) of 57.5 sen: Kejuruteraan Asastera Bhd (KAB) is appointed, by Binastra Land Sdn Bhd, the nominated subcontractor for the complete, supply, delivery, installation, testing and commissioning of the electrical services at three blocks of serviced apartment and hotel on Lot 162, Sungai Besi, Kuala Lumpur. Work on the project, which has a contract sum of RM19 million, started on Jan 9, 2020 and is expected to complete by Nov 15, 2022.
With this job win, KAB’s outstanding order book is estimated at RM350 million, translating into 2.5 times financial year 2018 (FY18) revenue. Assuming a gross margin of 18%, the project is expected to contribute a net profit of RM1.4 million or 0.4 sen per share throughout the construction period.
KAB secured about RM150 million new jobs in 2019, versus our previous assumption of RM200 million. This was lower than the RM180 million secured in 2018. Earnings adjustment is made to reflect the actual total job wins in FY19. As a result, earnings forecasts for FY19/FY20/FY21 are lowered by 6.8%/21.5%/19.2% respectively.
We see the management putting in concerted effort in related diversification, by venturing into energy-saving and solar energy segments, to offer value-added services to clients and broaden its customer base. This is a strategy adopted by KAB to differentiate itself from other ordinary mechanical and electrical engineering services providers which compete in a fragmented market.
In view of the above, as well as the huge potential from geographical expansion in the Asean region, we raise KAB’s target price-earnings ratio from 16 to 18 times. This is also supported by strong current outstanding order book of RM350 million and solid balance sheet with a net cash position of RM10 million or 2.7 sen per share as at end-September 2019.
All in, we cut KAB’s TP from 65 sen to 57.5 sen, based on 18 times calendar year 2020 earnings.
While we see growth potential in KAB from related diversification and acquisitions, we think the share price may have run ahead of its fundamentals as it has recorded a huge gain of about 605% in just 12 months. — TA Securities, Jan 10