As an investor, we must possess the skill to identify the next “trending” sector before everyone else. For the past one month, the general construction sector, of FBMKLCI Construction Index had climbed 16.17% from its low.
However, AGESON BERHAD had lagged behind with a rally of only 4.17%.
This leads us to our key question for debate today - Is AGESON BERHAD (7145) a good company?
Before I proceed, Pheim Red Fund usually analyse a company from financial perspective and would jump into technical afterwards. And I would not factor in personal feelings into a company as numbers are your best friends, and should be your only friend.
2020 had been a harsh year for all the properties and construction players. However, AGES is able to deliver quite some fascinating results since the beginning of FYE June 2020.
During MCO, which is the worst month for most construction players, AGES surprisingly announced a net profit of RM 17.3 Million out of RM 35.9 Million revenue. Which translates into a close to 50% net profit margin..
“WOW! Then it must be a one-off thing” – Your mind might be telling you this.
To be fair, yes the earnings also factored in some one-off items, such as backlog operating expenses, but the net profit would still be around RM 10 Million, which is still close to 28% net profit margin!
Interestingly, during the same period, all construction players were badly affected by the MCO. Whether it is Inta Bina, Sunway Construction, GDB Holdings, Kerjaya Prospek, or even the tier 1 infrastructure big boys. Why would AGES, a small cap company is delivering a double digit profit margin that is above “teens” ?
I would conclude the whole thing in one word – business model.
Having a close friend of mine working as a sub-con for AGES, I was told that AGES was particularly aiming for high margin contracts only. And with their implementation of technology into construction, the Building Information Modelling (BIM) and Industrialised Building System (IBS), AGES is able to enjoy crazily good margins.
You may study more about construction technology 4.0 over here.
We may also study the latest quarterly result published by AGES. Yes, we see a lower QoQ growth as compared to the immediate preceding quarter, but it was caused by lower progressive billing recognized by the company.
If you are new to analysing construction sector, their recognition model of revenue and net profit does not come in as a whole for the contract. It would be in the model of “job done = income recorded”. This quarter is a temporary low for the company as they were in the midst of furnishing the rest of their construction projects. And it would return to normal level of RM 8 – RM 10 Million in the next quarter!
Moreover, AGES gearing is extremely low. Currently AGES is having a current ratio of close to 2 times and their cash on hand is around RM 15.4 Million, with RM 22.4 Million of debt in bank. This is considered very healthy in the overall construction sector!
From fundamental analysis wise, AGES's financial studies can be only concluded in one word - SOLID. While all other construction companies are enjoying a recovery in terms of share price and valuation (P/E), AGES trailing 4 quarters is still trading below 5 times. Hence, I would consider the company deeply undervalued, and based on the current EPS of 4.38 cents per share, AGES's actual share price should be around 22 cents!