• Tuju Setia has completed a total of 18 high-rise building construction projects with an aggregate value of RM2.23bn since commencing operations in 2006. We like Tuju Setia for its strong earnings visibility, backed by an outstanding orderbook of RM953.1m and a strong clientele base.
• • We project earnings to grow by 45.2% YoY to RM23.7m in FY21f, mainly due to the resumption of projects execution from the strong outstanding orderbook.
• • Tuju Setia is valued by pegging its FY21f core EPS of 7.5 sen to 11.0x PE (slight premium to peers average of 9.6x), leading to a FV of RM0.82.

Company Background

• Tuju Setia Bhd’s (Tuju Setia) history traces back to the incorporation of Pembinaan Tuju Setia Sdn Bhd (PTS) in 2005 and subsequently commenced operations in 2006 as a building contractor for the provision of construction services including the construction of non-residential and residential buildings in Malaysia. PTS is a registered Grade G7 contractor with Construction Industry Development Board (CIDB), which enables the group to undertake construction contracts without any restrictions on the contract value.
   
• In 2008, Tuju Setia secured their first non-residential building construction contract; Mydin Hypermarket Project. Since then, Tuju Setia engaged in various construction works, namely SetiaWalk, helicopter hangar in Melaka, construction of an integrated complex comprised a shopping mall and transportation hub for the KLIA2 Integrated Complex, Top Glove Tower, Grand Medini Residence, RUMAWIP SkyAwani Residence, PPAM Sofiya Residensi and Kajang Women and Children Hospital.
   
• In 2012, Tuju Setia became a wholly-owned subsidiary of Tuju Setia Holdings Sdn Bhd. In 2019, Tuju Setia obtained a Certificate of Government Procurement Works (SPKK) from the CIDB, which allows the group to participate in tenders for government projects. Since commencement in 2006, Tuju Setia have completed a total of 18 high-rise building construction projects with an aggregate value of RM2.23bn. Tuju Setia is now back by an outstanding orderbook of RM953.1m to provide earnings visibility till FY24.
   
• Tuju Setia principally engages in the construction of non-residential and residential buildings. Tuju Setia will be responsible for the overall project process that includes project planning and management which covers implementation of all stages of the project including earthworks, site preparation, construction up to the completion and handover of the overall project and application of Certificate of Practical Completion (CPC).
   
• Geographical wise, all but one project were located in Kuala Lumpur and Selangor during the period under review. There are various types of building projects undertaken by Tuju Setia such as mixed-use commercial building, service apartments, high-rise condominiums, office building, hypermarkets and institutional buildings. • Some of Tuju Setia’s customers include notable public-listed property developers such as SP Setia Bhd, Symphony Life Bhd, Guocoland Bhd, Top Glove Corporation Bhd, Tropicana Bhd, IJM Bhd and UEM Sunrise Bhd as well as reputable corporations such as Malaysian Public Works Department (JKR), Perdana ParkCity Sdn Bhd and BSC Land Development Sdn Bhd. • Based on FY20 revenue of RM255.8m, the construction of non-residential buildings rakes up to RM103.7m, representing 40.5% of total revenue, followed by RM102.2m from construction of residential buildings (40.0% of total revenue) and balance RM49.9m from design and construction of hospital (19.5% of total revenue). Between FY18-20, the construction of non-residential buildings segment anchored the group’s total revenue.

• Due to the implementation of Movement Control Order (MCO) in Malaysia, Tuju Setia’s operations were temporary suspended since 18th March 2020 before resuming partial operations on 19th April 2020 and subsequently resume full operations on 4th May 2020. Following the hiccups in construction progress during the MCO and CMCO period, Tuju Setia has received extension for four major projects.

• Year-to-date Tuju Setia has secured 4 major construction projects that bump its’ outstanding orderbook to RM953.1m which will provide earnings visibility until FY24. Meanwhile, tenderbook stands at RM3.96bn, comprising of a good mix of non-residential, residential and hospital projects.

Industry Overview

Malaysia’s construction industry outlook

• The Malaysia construction industry is segmented into three major subsectors namely; building construction, civil engineering construction and specialised construction. Building construction revolves around construction of residential and non-residential buildings, while civil engineering construction comprises construction of infrastructures to cater for public usage such as roads, railways, bridges, seaports, airports and utility projects. Meanwhile, specialised construction refers to construction of certain parts of the buildings and civil engineering works without the responsibility of the entire project. • Historically, Malaysia’s construction work completed has been on the rise (with the exception of 2020 due to implementation of MCO following the Covid-19 pandemic breakout). In 2020, the value of construction work completed by subsectors stood at RM117.82bn, representing a 5-year CAGR of 0.5%.
   
• In the meantime, building construction for residential and non-residential projects (which is Tuju Setia’s area of expertise) makes up to RM60.74bn or 51.5% of total value of construction work completed by subsectors in 2020.
   
• Given that the building construction industry is well correlated with the property development industry, the performances of property transactions will be a key driver to shape the health of the building construction industry. Historically, the value of residential & non-residential property transactions (exclude 2020) has been on a flattish mode, ranging between RM93.9-101.52bn during 2015-2019.
   
• Following the decline in 2020, we expect pickup in the value of residential & nonresidential property transactions as delay of purchases in 2020 may transpire in 2021, while the improvements will also be back by the Covid-19 vaccination rollout that would help in controlling the Covid-19 pandemic and fast-track the economy on a recovery path.

• In the meantime, the government has implemented various affordable housing schemes in order to boost homeownership which deemed to be positive for the building construction industry. Based on Budget 2021, the government continued to promote several home ownerships campaigns. The move bodes well for Tuju Setia which has experience in undertaking the construction of affordable housing projects such as PPAM Sofiya Residensi and RUMAWIP SkyAwani Residence.

Investment merits

Established track record in high-rise construction

• Tuju Setia core area of expertise lies within the construction of high-rise buildings which accounted for more than 80.0% of our total revenue in FY17-20. The established track record accompanied by recurring projects from customers in construction of high-rise buildings serves as a strong reference for future tenders.

Underpinned by strong outstanding orderbook

• Presently, Tuju Setia is equipped with a solid outstanding orderbook of RM953.1m that will provide earnings visibility till FY24. In the meantime, tenderbook stands at RM3.96bn, comprising of a good mix of non-residential, residential and hospital projects that will continue to beef up the existing outstanding orderbook.

Provision of timely projects completion and quality of construction works

• Over the years, Tuju Setia has completed all their projects without requirement of time extension. Additionally, one of the projects; Geo Bukit Rimau was completed two months ahead of schedule. Tuju Setia has also obtained certifications such as SHASSIC and QLASSIC from CIDB as well as CONQUAS from Building and Construction Authority of Singapore which serve as testaments of work quality.

Adoption of various Industrialised Building System (IBS) construction techniques and offer value engineering in providing alternative designs

• Tuju Setia adopts various IBS techniques comprising the use of aluminum formwork system for cast in site construction, and prefabricated concrete components manufactured on-site and off-site. The use of IBS will ensure dimensional accuracy and consistency of each of the building components, as well as better control of project scheduling. IBS techniques also improve productivity, by speeding up the construction process that shortens project timeline.

Provision of design and construction of hospitals including procurement and installation of Group 1 medical equipment

• Apart from its core competency in building construction, Tuju Setia undertook the design and construction of Kajang Women and Children Hospital Project which includes procurement and installation of medical equipment. The move may serve as a competitive advantage for the bidding for healthcare facilities projects. Tuju Setia will be eyeing on a slice from the Budget 2021 allocation for healthcare services which include RM366.0m for the construction of new hospitals.

Financials

• Tuju Setia’s core net profit has demonstrated consistent improvements in FY17-20, registering RM16.3m in FY20 (3Y CAGR of 30.7%), supported by higher work orders execution during the aforementioned period, while the improvement in net margins recorded from 2.5% in FY17 to 6.4% recorded in FY20 was largely due to execution higher margins scope of work such as the design of the building and installation of mechanical & electrical works for the Kajang Women and Children Hospital project.

• Moving forward, we are projecting the core net profit to remain on course for further improvement, rising by 45.2% YoY to RM23.7m in FY21f, mainly due to the resumption of projects execution from the outstanding orderbook of RM953.1m as we note that MCO 2.0 did not have any adverse impact on the group’s operations that is deem to be essential. We reckon that net margins to remain sustainable; above 5.0% mark as Tuju Setia aims to focus on projects with job scopes such as design and building projects that typically yields with higher margins.

• While there four major projects completion timeline being extended, we note that Tuju Setia did not receive any notification on project cancellation nor termination. Meanwhile, there was also no supply disruption for new orders of construction materials.

• Going into FY22f, we reckon that Tuju Setia’s top and bottom line is expected to see further improvement to RM492.8m (+9.5% YoY) and RM27.2m (+14.7% YoY) respectively, supported by the addition of in-house machineries and equipment that is able to cater additional contract works. Meanwhile, the addition of 5.0-ac. land at Klang Valley with 80,000 sqf built-up area may improve efficiency of maintenance works.

• We like Tuju Setia for its strong balance sheet position, equipped with a net cash position over the years under review. We also gather that Tuju Setia adopts a dividend policy of maximum of 25.0% pay-out from net profit.

Valuation

• At an IPO offer price of RM0.70, Tuju Setia’s forward PE valuation for FY21f and FY22f stands at 9.4x and 8.2x, based on our estimated FY21f and FY22f EPS of 7.5 sen and 8.6 sen respectively. We arrived our fair value of RM0.82 (17.1% upside from its IPO price) by assigning a target PE of 11.0x to its FY21f EPS.

• The assigned target PE is a slight premium to the construction peers average listed on Bursa Malaysia at 9.6x. This is supported by the improving margins trend which we expect to remain in place, coupled with solid outstanding orderbook of Tuju Setia which will provide earnings visibility till FY24.

Source: Mplus Research - 3 May 2021