We initiate coverage on Binastra Corporation Berhad (BNASTRA) with a BUY recommendation. Assigning a target P/E multiple of 18x to BNASTRA’s CY25 EPS, we value BNASTRA at RM2.05/share. Looking ahead, we anticipate a stronger earnings outlook for BNASTRA, supported by its robust outstanding orderbook of RM3.2bn and the promising potential for further orderbook growth.

Investment Merits

1. The master of builders with strong building capabilities,

2. Robust orderbook growth prospect anchored by sticky clientele relationships, and

3. Unique business model yields a higher profitability margin.

Earnings Forecasts

We project remarkable earnings improvement of 127.6%/36.8%/37.3% to RM92.7mn/RM126.8mn/RM174.0mn in FY25/26/27F, respectively. This is largely driven by: (i) FY25/26/27F new orderbook replenishment assumptions of RM3.0bn/RM2.5bn/RM2.5bn, respectively, (ii) a robust outstanding orderbook totalling RM3.2bn as of Sept-24, and (iii) an average net margin of 9.6%/9.1%/9.3% for FY25/26/27F, respectively.

Valuation

For valuation purposes, we compare BNASTRA to peers with similar operations and project margin, i.e. Kerjaya Prospek Group Bhd. We ascribe the same target P/E multiple of 18x to BNASTRA and arrive at a fair value of RM2.05/share. Although the group does not have a formal dividend policy, we believe the factors discussed above outweigh the absence of dividend payouts, making BNASTRA an attractive investment opportunity with an upside of 43.4%. We initiate coverage on BNASTRA with a Buy recommendation.

Business Overview

Binastra Corporation Bhd (BNASTRA) is an investment holding company, with its wholly owned subsidiary, Binastra Builders S/B being a registered G7 building contractor under the Construction Industry Development Board (CIDB) with a proven track record spanning over four decades in Malaysia. Since its establishment in 1980, BNASTRA has successfully completed 189 projects with a total value exceeding RM12bn, solidifying its reputation as a highly respected contractor in the industry.

BNASTRA embarked on its listing process through a reverse takeover of the financially distressed company, Comintel Corporation Bhd (Comintel), which fell under PN17 status in 2019. Subsequently, BNASTRA implemented a comprehensive regularisation plan – which was spearheaded by its current Managing Director, Datuk Jackson Tan Kak Seng and his management team – successfully completed by December 2022, leading to Comintel’s official upliftment from PN17 status in September 2023. In March 2024, Comintel was rebranded as Binastra Corporation, marking a new chapter in the company’s growth and success.

BNASTRA is principally engaged in planning, managing, supervising, and monitoring the entire construction projects as a main contractor, with its operations based in the Klang Valley. Its engineering expertise extends to specialised construction such as earthwork, rock hacking, piling and reinforced concrete framework, as well as architecture and infrastructure works for both residential and non-residential buildings. As of end-July 2024, the group had secured six new projects with a combined YTD value of RM1.1bn. This was followed by five additional contracts in August and September, amounting to RM1.4bn. We estimate its total outstanding orderbook value stands at RM3.2bn as of Sept-2024, with the breakdown as illustrated in Exhibit 5.

Investment Merits

1) The master of builders with strong building capabilities With over 40 years of construction experience, BNASTRA has built a solid reputation for its strong building construction capabilities, particularly in managing complex and large-scale projects. The company’s success is driven by a highly experienced professional team capable of handling multiple projects simultaneously, supported by senior subordinates who receive continuous training in leadership and teamwork. BNASTRA’s efficient supply chain and wellcoordinated project management ensure seamless and timely execution, making it a preferred contractor for many property developers. This is especially evident in high-rise condominium developments, which require a higher level of precision and quality, where BNASTRA consistently delivers with minimal defects and smooth handovers.

The company is well-positioned to capitalise on its extensive expertise, with plans to increase its annual building capacity from approximately RM1.0bn to RM1.2bn via growing its sub-contractor pool. Furthermore, BNASTRA is primed to capture more opportunities in the growing data centre sector by leveraging its proven construction capabilities and track record for swift project delivery. Notably, BNASTRA has secured contracts for two adjacent data centres from EXSIM in Aug-23 and Sept-24, located in Bukit Jalil, Selangor. These centres, with a combined capacity of 15.5MW and 15MW, are contracted by Singapore-based offtaker, Aperia Cloud Service. The projects, valued at RM161.3mn and RM574.4mn respectively, underscore BNASTRA's expertise in delivering highly complex developments with precision. Leveraging the growing demand for building and data centre projects, BNSTRA aims to grow its orderbook replenishment from approximately RM3.0bn to RM5.0bn per annum in the foreseeable future.

2) Robust orderbook growth prospect anchored by sticky clientele relationships

BNASTRA’s promising orderbook growth is underpinned by its long-standing relationships with three key clients: Exsim Development Sdn Bhd (EXSIM), Platinum Victory Sdn Bhd (PV), and Maxim Global Bhd (MAXIM). These partnerships, built on mutually beneficial agreements, have enabled BNASTRA to play a crucial role in helping these developers expedite project launches. The company's proven track record of timely project delivery has been instrumental in supporting the growth and success of its clients’ developments.

Positioning itself as a one-stop, integrated construction service provider, BNASTRA has secured a steady pipeline of projects from these three clients, ranging from affordable and premium housing developments, especially in the Klang Valley. The company’s sound operating cash flow, strong net cash position, and efficient project management further strengthen its ability to execute these projects successfully, ensuring the sustainability of its orderbook.

Looking ahead, EXSIM, PV, and MAXIM are expected to roll out multiple projects with an average total gross development value (GDV) of approximately RM10bn per annum over the next three years, focusing on key areas within the Klang Valley, Johor Bahru (Johor), and Kota Kinabalu (Sabah). Following the strong take-up rates from previously launched developments, EXSIM and MAXIM are set to continue deploying new projects in prime locations such as Central Park Damansara, Bukit Jalil, and KL Wellness City. To address the growing demand for residential housing in Johor Bahru, both developers are poised to launch new projects with a GDV more than RM3bn on their land banks in southern regions, namely Kebun Teh, Lumba Kuda, and Taman Pelangi area, capitalising on their strategic locations near the Johor-Singapore border.

With construction typically accounting for about of 50~55% of its GDV, BNASTRA is well-positioned to benefit significantly, supporting its new orderbook replenishment target of RM5bn per annum, a goal that now appears increasingly achievable for the next five years.

3) Unique Business Model Yields a Higher Profitability Margin

BNASTRA’s unique business model enables it to achieve higher profitability margins compared to its peers. With its extensive expertise in high-rise construction, the company often engages in direct negotiations with developers, which not only increases its success rate in securing projects but also enhances its bargaining power to negotiate favourable terms and achieve decent profit margins. This approach has consistently allowed BNASTRA to deliver net margins in the range of 9-11%, significantly above the industry average range of 4.5%-5.5%.

The company's profitability is further strengthened by its strategic procurement practices and efficient project planning. Additionally, BNASTRA’s stable relationships with key clients allow the implementation of cost optimisation measures since the early stages of a project, as both the construction team and subcontractors are familiar with the clients' expectations and quality standards. Furthermore, BNASTRA leverages its strong net cash position to finance certain projects, ensuring smooth progress and timely completion, which in turn strengthens client loyalty and ensure timely payments.

Outlook

The construction sector has generally faced setbacks since the COVID-19 outbreak and the rise in input costs in 2020. However, the revitalisation of the property sector in 2024 has provided a significant boost to the construction industry, resulting in an increased project flow for construction companies. With adjustments to civil servant remuneration packages and a positive GDP outlook, we expect the demand for affordable housing to remain intact amid the improving economic conditions. Furthermore, plans to transform Forest City in Johor into a new financial hub are likely to stimulate demand for residential housing in the surrounding areas to accommodate the growing needs for housing. This trend will be further supported by the completion of the Johor Bahru-Singapore Rapid Transit System (RTS) by the end of 2026 and the potential rollout of the Johor Elevated Automated Rapid Transit (ART) in 2025, both of which are expected to boost demand for residential properties near the railway stations. This presents a golden opportunity for EXSIM and MAXIM, whose land banks in Johor Bahru are strategically located within a 5km radius of the RTS station. Correspondingly, this surge in demand will also benefit BNASTRA, given its strong partnership with EXSIM and MAXIM as their preferred contractor.

Key Risk Associated With the Business and Industry

1) Highly Dependent on the Key Clientele Group

As of the end of September 2024, 95.2% of BNASTRA’s outstanding orderbook was made up of projects from its three key clients. Looking ahead, the company’s future orderbook growth will largely depend on the continued project launches from these same developers, making BNASTRA’s replenishment prospects closely tied to their upcoming developments. While these relationships have been crucial to the company's success, they also present a concentration risk in the event of a slowdown in new launches or any potential strains in these key partnerships. That said, we believe the risk is minimal due to the strong, longstanding relationships between BNASTRA and its key clients. Additionally, its robust orderbook of RM3.2bn as of September 2024 (representing 7.6x FY24’s revenue) provides solid earnings visibility through FY28, offering a strong buffer against any near-term challenges.

2) Fluctuation in Input Costs

Key construction materials, such as steel, ready-mixed concrete, sanitary wares, tiles, and cement, are highly sensitive to price fluctuations. Any significant price volatility or shortages in these materials could lead to cost overrun, potentially squeezing margins and negatively affecting the company’s financial performance. Given BNASTRA’s reliance on these essential materials, fluctuations in availability and pricing pose a risk that could impact the company’s ability to maintain profitability, especially if the company is unable to pass on higher costs to clients.

3) Dependent on Foreign Workers

BNASTRA’s operations rely heavily on foreign labour. Any shortages or increases in minimum wage could lead to project delays and higher operational costs, which would negatively affect its business operations and profitability.

4) Dependent on the Malaysian Property Sector

BNASTRA’s business is closely linked to the performance of the Malaysian property sector. Any slowdown in the local property market could directly impact the company’s financial performance, potentially lead to reduced demand for construction services and project delays or cancellations. A downturn in the property sector could hinder BNASTRA’s ability to secure new contracts, potentially resulting in lower revenue and profitability.

Financial Highlights

1) Results Review

Following the completion of its reverse takeover, BNASTRA achieved remarkable revenue growth, surging from RM38.5mn in FY22 to RM425.2mn in FY24. This robust growth was driven by an effective regularisation plan implemented by the current management and a steady inflow of new projects. The company’s net margin declined from double digits to high single digits in FY23, due to rising input costs and minimum wage adjustments. Despite this, the impact is expected to be manageable as upcoming higher-margin projects are anticipated to offset the lower margins of earlier contracts. In line with its strong revenue growth, BNASTRA’s core net profit soared from RM4.0mn in FY22 to RM40.7mn in FY24.

Earnings Forecasts

Looking ahead, we project a strong YoY revenue growth of 128.1%/43.8%/34.6% for FY25/26/27f, respectively. This topline expansion is expected to drive a substantial core earnings growth of 127.6%/36.8%/37.3% to RM92.7mn/RM126.8mn/RM174.0mn for FY25/26/27f, respectively.

This remarkable earnings growth is largely based on the following key assumptions:

• New orderbook replenishment assumption per annum of RM3.0bn/RM2.5bn/RM2.5bn for FY25/26/27F;

• A robust outstanding orderbook of RM3.2bn as of end-September 2024;

• Average net margin of 9.6%/9.1%/9.3% for FY25/26/27F.

We believe our new orderbook replenishment assumptions are highly achievable, banking on the strong project inflow outlook driven by robust project launches from key clients. To recap, BNASTRA’s YTD new job wins totalling RM2.5bn for FY25, represents 83.3% of our full-year new job assumption. Additionally, BNASTRA is close to finalising one or two more contracts with EXSIM, expected to come from new phases of KL Wellness City (Klang Valley) and Kebun Teh (Johor), collectively worth at least RM500mn. This ongoing momentum reinforces our positive outlook on the company’s ability to achieve its replenishment targets, strengthened by its strong client ties and proven project delivery.

Nevertheless, we anticipate that the net margin will hover around an average of 9.3% over the next three years, driven by several key factors: (i) lower profitability from the Kota Kinabalu, Sabah project, where the construction work will be partly carried out by local subcontractors, (ii) an increasing share of data centre projects in the orderbook, which typically yield mid-single-digit net margins, and (iii) the expansion of the subcontractor pool to support the company's increased building capacity. Despite these factors, BNASTRA’s projected margins remain well above the industry average of 4.5% to 5.5%, highlighting its operational efficiency.

Balance Sheet

Based on BNASTRA’s 2QFY25 report, the group’s strong net cash position stood at RM44.4mn with a gross gearing of 14.2% as at July-24.

2) Dividend Policy

The group currently does not have a consistent dividend policy due to insufficient capital reserves. However, the group intends to start paying dividends from FY26 onwards, targeting a minimum payout of 30% of its core net profit, once its financial performance is consistently strong and stable. As such, we project a FY26 and FY27 DPS of 3.5sen and 4.8sen, respectively, based on a 30% payout ratio. This would translate to a dividend yield of 2.4% and 3.4%, respectively, based on the last closing price.

ESG Performance

As part of its Environment, Social, and Governance (ESG) assessment, BNASTRA is committed to identifying material challenges and formulating a strategy to integrate sustainability into its business operations. This approach will enable the company to address environmental, social, and governance factors while enhancing its overall operational efficiency and long-term resilience. The group sustainability efforts in the areas of Environment, Social, and Governance (ESG) are as follows:

Environment: The group is actively engaged in climate-conscious initiatives, such as utilising energy-efficient LED lighting and installing inverter-type air conditioners in its offices. BNASTRA also regularly participates in tree-planting activities at Taman Tugu, contributing to carbon emission reduction and minimising its carbon footprint. Furthermore, many of its construction sites are equipped with rainwater harvesting systems to reduce reliance on municipal water supplies. These efforts aim to promote environmental sustainability while ensuring that construction activities are conducted responsibly, with proper waste management measures in place to minimise excess waste and preserve a greener planet.

Social: BNASTRA is committed to upholding human rights by providing comprehensive employee benefits for all workers, including foreign employees. These benefits include annual leave, sick leave, hospitalisation leave, medical coverage, insurance, and weekly sports activities, reflecting the company’s dedication to employee well-being. Furthermore, the group fosters a respectful and professional working environment, ensuring full compliance with relevant labour laws and prioritising the health and safety of its staff. To support the continuous development of its workforce, the group regularly organises training programs aimed at upskilling and reskilling employees, demonstrating its commitment to nurturing potential talent and promoting a culture of growth and empowerment.

Governance: The group demonstrates a strong governance by enforcing a strict zero-tolerance policy towards corruption and bribery, as outlined in its Anti-Corruption and Bribery (ACB) policy, which complies with the Malaysian Anti-Corruption Commission (MACC) Act 2009. The company has established a whistleblowing channel that allows employees and external stakeholders to confidentially report misconduct directly to the Chairman of the Audit and Risk Management Committee through email or mail. To further reinforce its anticorruption stance, BNASTRA has conducted comprehensive training sessions for all board members and key management personnel, ensuring their full participation and promoting a culture of integrity throughout the organisation. Additionally, the group places strong emphasis on complying with policies and regulations related to ESG factors, recognising their importance for long-term success. By proactively adhering to these standards, BNASTRA not only strengthens its competitive position but also appeals to socially responsible investors, thereby enhancing its market standing. Ultimately, the company's dedication to ethical practices and sustainability is key to achieving long-term growth and profitability.

Overall, we assign BNASTRA an ESG rating of three stars (★★★), reflecting the group's commendable efforts to meet ESG requirements and ensure long-term, sustainable value creation.

Recommendation

For valuation purposes, we compare BNASTRA to peers with similar operations, target markets and project margins, i.e. Kerjaya Prospek Group Bhd. We ascribe the same target P/E multiple of 18x to BNASTRA, arriving at a fair value of RM2.05/share. This is after considering that the group has:

(i) Similar target clientele, business operation and decent net margin;

(ii) Robust and resilient orderbook growth outlook;

(iii) Relatively higher ROE, and;

(iv) Stronger EPS growth.

Although the group does not currently have a formal dividend policy, we believe the factors discussed above outweigh the absence of dividend payouts, making BNASTRA an attractive investment opportunity with an upside of 43.4%.

Thus, we initiate coverage on BNASTRA with a Buy recommendation.

Source: TA Research - 16 Oct 2024