• MYR0.46 FV based on 12x FY24F P/E. Vestland’s design and build expertise, which provides better project oversight and cost management, enables the group to retain clients and provides stable job flow. Future earnings will be anchored by its diverse portfolio in private and government projects spanning across states – Selangor, Pahang and Sabah. In light of the stable and consistent job replenishment trends, we view its valuation as undemanding – trading at 8.2x FY24F P/E (below -2SD from the Bursa Malaysia Construction Index’s 5-year mean).

• Commendable orderbook prospects. The group has c.MYR2bn worth of work orders in hand as at end Nov 2023 (translating to an orderbook/revenue cover ratio of 6.6x (higher than the average of 3-4x for construction stocks under our coverage) based on FY22 revenue. Around 75% of the total outstanding orderbook is made up by high-margin (c.3-5ppts higher than build-only projects in terms of GPM) design and build projects, followed by the build segment at 20% and civil engineering works segment at 5%. Job replenishment prospects are backed by the group’s tenderbook size of c.MYR3bn (estimated success rate of 30-35%) as of end Nov 2023, of which c.56% is from design and build projects comprising a good mix between industrial buildings, apartments, affordable homes and civil engineering (road maintenance works).

• Earnings estimates. We are projecting a 3-year earnings CAGR of 18% for Vestland, largely in tandem with stronger orderbook replenishment and favourable project mix. We take the view that the group would be able to retain its existing clients and attract new ones moving forward due to the capability of its design and build construction services that command a better margin as mentioned above. Recurring net profit margin is expected to be at 8.5-9.3%in FY24F-25F, taking into account yearly replenishment order assumptions of MYR900m and MYR950m for FY24F-25F.

• Valuation. We ascribe a FV of MYR0.46 based on a target 12x FY24F P/E. For peer comparison purposes, we chose small- to mid-cap construction players such as, Kerjaya Prospek (KPG MK, BUY, TP: MYR1.93), MGB (MLG MK, BUY, TP: MYR1.13), Gabungan AQRS (AQRS MK, BUY, TP: MYR0.43) and Inta Bina (INTA MK, NR). We believe that this target valuation of 12x is justified, as it is within our range ascribed to the majority of small- to mid-cap contractors under our coverage. The target valuation being at the high end of the 10-12x range ascribed to small- and mid-cap contractors takes into consideration of its earnings growth potential of c.30% for FY24F-25F, backed by better job replenishment prospects (particularly design and build).

• Rerating catalysts include the potential of securing sizeable road-related infrastructure in Sabah and school-related contracts nationwide.

• Key risks: Sluggish job replenishment trends, unexpected fluctuation in the price of building materials, and sudden shortage in labour supply.

Source: RHB Research - 26 Feb 2024