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Year-to-date, the Bursa Malaysia Construction Index has only increased approximately 20% and until today it still remains as one of the lagging industry today as compared to their peers. The construction industry has been lagging behind as compared to the other industry due to the implementation of MCO by our government. If we were to analyse the construction companies quarterly report, the management commented that the outlook for the construction industry will remain challenging and completion of the projects might face some delays. However, to further boost our country economic activities, the government could revive some of the mega projects such as HSR (GDV of 110 billion), ECRL (44 billion previously, current is about 50 billion), Bandar Malaysia (140 billion – almost half of malaysia GDP – Malaysia GDP is 365 billion in 2019. This shows how big and crucial the entire project is) and Penang Transport Master Plan (46 billion).
For the HSR Project, the government recently launched an open tender for Land Consultant Tender and Environmental, Social and Heritage Impact Assessment Consultant. The purpose of the appointment of the consultant involves the preparation of the land acquisition plan and carry out the Environmental Impact Assessment (EIA), Social Impact Assessment (SIA) and Heritage Impact Assessment (HIA) study. The closing date of the tender is 15th September and 18th September respectively.
As for ECRL, our transport ministry has confirmed the plan to revert to original ECRL alignment and it will cost slightly more than the previous alignment (approximately 6 billion higher than the original price). Some of the beneficiaries for this project include MMC Corporation, HSS Engineers Berhad, Gadang, MRCB, AZRB, IJM, WCT and GBGAQRS.
Penang Transport Master Plan – On the 1st of July 2020, Gamuda Bhd announced that the Penang state government had confirmed the appointment of the construction giant to be the project delivery partner (PDP) for the Penang Transport Master Plan and the estimated costs are approximately 46 billion. However, according to the management, they did highlight that the PTMP is not expected to have any material effect on its earnings for the current financial year ending July 31, 2020 (FY20).
Let’s dive in deeper and analyse & assess the financials of the respective construction companies and perform a comparison between their peers.
Overall, Gamuda, GDB, GKent, HoHup, Kerjaya and Sunway Construction are generating a higher gross margin & profit margin as well as the profit margin as compared to the industry average of 20%. GDB, Kerjaya and Sunway Construction has shown a good ROE which indicates that the Company’s management team is better than average at utilizing the company equity to generate profits.
The above table indicates that GDB, GKent, HSL, Kerjaya and Sunway Construction display an exceptional result in which their current ratio is above industry average of 1.89. On top of that, they are all operating at a healthy operating cash flow. On the other hand, Gadang and GBGAQRS is at present generating negative operating cash flow. If the negative operating cash flow were to persist (which it could due to current unprecedented event), the company would need raise more capital or borrow more money/ funds (financing activity) to continue paying off their loans/ interest or to finance their projects. However, this may not be the case as of now, as their cash ratio and current ratio is still at a healthy level.
GDB, GKent, HSL and Kerjaya are displaying a healthy and strong leverage ratio and a good debt ratio (below 0.5). In other words, no more than half of the company’s assets are financed by debt.
Just like P/E ratios (price-to-earnings), the lower the EV/EBITDA, the cheaper the valuation for a company. Different industry would have different valuation or average. We took an EV/EBITDA of below 10 as an industry average or best practices. Based on EV/EBITDA as a benchmark, Gkent seems to be undervalued as compared to their peers. However, the ugly award still goes to Gadang, GBGAQRS and Gkent. The three companies are showing negative free cash flow over sales. Free cash flow is key for the company and its shareholders because this cash can be utilized to pay higher dividends, repurchase shares to reduce shares outstanding or even acquire another company to enhance growth prospects for the company. With negative FCF, it would potentially affect the tender process as well during the technical evaluation stage. Company balance sheet is one of the key components that the tender committee assess during the tender technical evaluation stage.
Overall, most of the construction companies in Malaysia have a large order book in the pipeline for them to continue generating healthy top line for the next 2 to 3 years. Gkent financial health is healthy, but the current order book should be a concern for investors moving forward as they will require to continue tendering and winning more projects for them to sustain their current earnings and showing improvement in their top line.
After analysing the different financial aspects of the selected construction companies, it’s obvious that the company that stand out among the peers are GDB, HSL and Kerjaya. Gkent to a certain extent, did put up a good fight in terms of profitability, liquidity and leverage analysis. However, they will need to continue winning more projects to increase their current order books as well as generating a positive free cash flow.
The favourite construction companies will still be GDB, HSL and Kerjaya which is current displaying a more outstanding result in most of the financial aspects. In terms of upcoming earnings visibility for the next 2/3 years, GDB and HSL could be the favourite among the three finalists. The current order book for GDB remains at 3.25. However, this is excluding their tender book of approximately RM 4 billion in the pipeline. A simple 30% conversion out of the RM 4 billion would display an outstanding earning visibility for GDB.
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