KAB (0193) - 6 Things You Need To Know About Kejuruteraan Asastera Berhad (KAB) IPO
Kejuruteraan Asastera Berhad (KAB) is scheduled to be listed in ACE Market of Bursa Malaysia on this Friday, 17th November 2017. In this article, we share a few thing that you might need to know about this company.
What KAB does?
KAB is principally involved in the provision of electrical and mechanical engineering services involving the air-conditioning and mechanical ventilation project for both commercial and residential buildings. Its customers are primarily main contractors, project owners and property developers in Malaysian construction industry.How Does The Sector Look Like?
Driven by various expansionary government policies and private investment activities to spur growth in the construction sector, we have seen a strong recovery from the sector from the past few years. With the Malaysian government allocating more resources on the affordable housing as well as public housing projects such as 1Malaysia People's Housing Programme (PR1MA), we think that the government’s efforts to launch these programmes nationwide are expected to bode well for the industry. Demands for mechanical and electrical engineering services in housing projects are anticipated to pick up with the growth of the industry. In addition, encouraging economic growth figures of Malaysia are another key drivers for the development of the industry.Where Does KAB Stand Among Peers?
There are mainly 2 categories of subcontractors in the construction sector, namely domestic subcontractorsand nominated subcontractors. Domestic subcontractors are appointed at the discretion of main contractor. In contrast, nominated subcontractors are nominated by project owner. In that case, main contractor is obligated to appoint the nominated company to be a subcontractor.Due to its familiarity, track record, resources or financial strength, it has been appointed as a nominated subcontractor in majority of its projects (close to 70% of its total projects in the last 3 years). This allows KAB manages to have direct negotiation with the project owner to bargain for some better terms and win contracts with less intensive competition as compared to public tender.
How Does Its Financials Look Like?
KAB has a sizeable orderbook of RM216.9m as of 31 May 2017, representing 2.3x of cover ratio over its revenue in 2016, which should provide earnings visibility for the coming two years. Gross profit margins are fairly decent at above 10% over the past 3 years, reflecting its strong negotiation as a nominated subcontractor. Net profits have been growing rapidly at 30%CAGR over the past 3 years, thanks to the government initiatives in promoting affordable housing which is expected to be here to stay over the coming years. While gearing level for KAB is fairly high at 0.73x, it expected to reduce significantly to 0.35x post IPO as part of the proceeds will be utilized to repay its bank borrowings. As a result, interest expense will likely to reduce considerably, providing further upsides to the earnings next year.Chart 1: Revenue Growths and Margins Have Been Decent
Source: Company’s Prospectus.
Does KAB Command An Expensive Valuation Given its Solid Fundamentals?
Looking at PE ratio of 12.5x for KAB, it is reasonable to say that the valuation for KAB is undemanding. On a relative basis, some newly listed construction companies such as HSS Engineers, Advcon and Inta Bina are trading at much higher PE ratios of 24.19x, 16.72x and 15.43x respectively after their post IPO rallies. Pegging to an average PE of 18.78X, fair value should be somewhat close to RM0.37 per share.Chart 2: Undemanding Valuations For KAB (PE ratio)
Source: Bursa Malaysia, Companies Prospectus.
How Does Other Similar IPOs Fare?
Looking the performance of some newly listed construction related companies such as HSS Engineers, Advcon and Inta Bina, we can see that all of them have experienced strong rallies post IPO, recording a 124%, 75% and 44% returns respectively (as of 14 Nov 2017), perhaps reflecting the positive sentiment for the construction sector on the back of their solid fundamentals. Therefore, it is likely for the market to react positively to KAB given good market sentiment for construction sector.Chart 3: Performance of Construction index vs KLCI in last 12 months
Source: Bloomberg
Disclaimer: The views above are opinions based on facts and subjective judgement. We do not take any responsibility for any actions rely on the information discussed.
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