• Local building contractor specialising in design & build method and incorporates a digital management application which improves business operation efficiency.

• We project its core earnings will continue to expand in the coming years that will be driven by the execution of a solid outstanding orderbook of RM947.4m (orderbook-to-cover ratio of 5.5x against FY21 revenue of RM171.1m) which will provide strong earnings visibility till FY26.

• VLB is valued by pegging its FY23f core EPS of 3.6 sen to PE of 12.0x, leading to a FV of RM0.43.

Company Background

• Vestland’s (VLB) commenced their operations as a contractor for residential and non-residential buildings in 2011. Residential buildings include apartments and landed residential buildings, while non-residential buildings include mixed use commercial buildings and offices, industrial buildings, service apartments, hostels and hotels.

• VLB secured their first high-rise project in 2014 for the construction of Pearl Suria Residence, a 25-storey high rise mixed-use development with a contract value of RM91.8m. That was also the maiden construction project whereby the group was engaged as a main contractor.

• In 2020, VLB expanded into the provision of design and build construction services via the Residensi Armani Petaling (Cheras) project valued at RM58.0m. On the following year, VLB obtained a Certificate of Government Procurement Works (SPKK) from CIDB that allows the group to participate in tenders for government projects in the area of building construction, civil engineering as well as mechanical and electrical works. VLB is also registered as G7 contractor with CIDB which allows the group to tender for projects at unlimited size nor value.

• To-date, VLB has completed 35 projects with collective contract value of RM1.13bn. VLB currently have 3 on-going build projects, 8 on-going design and build projects as well as 3 projects in civil engineering works that are in various stage of completion and will run till 2026.

• VLB principally engages in the provision of building construction services which involves build segment and design and build segment for both non-residential building projects and residential building projects across Malaysia. The group also expanded to undertake civil engineering works since 2021.

• In 6MFY22, the design and build segment accounts to 65.8% or RM92.1m of total revenue, followed by the build segment which makes up to RM45.5m or 32.5% of total revenue and lastly, the civil engineering works segment raked in RM2.3m (1.7% of total revenue). Over the past 3 years, the revenue composition has changed with design & build segment dominating the total revenue.

• The design & build segment that saw contribution steadily improving over the years, revolves around the responsibility for the overall project management as well as planning and coordinating the design aspects of the project covering the technical specifications adhering to the building compliance requirements and coordination of the relevant submissions to the authorities. To-date, VLB is equipped with an outstanding orderbook from 8 contracts with collective value of RM653.6m. Moving forward, VLB aims to expand their design and build capabilities in bid to improve overall project margins.

• Under the build segment, VLB will be responsible for the overall project management and planning, appointment of subcontractors, procurement of labour and materials and monitoring the stages of construction works to ensure completion of works up to project handover. To-date, VLB is equipped with 3 contracts from Binastra Construction and Armani Group with a collective outstanding orderbook of RM219.5m.

• Elsewhere, the civil engineering works segment which VLB expanded their scope of works since 2021 revolves around the slope stabilisation works, earthworks and rock hacking works. To-date, VLB is equipped with an outstanding orderbook of RM74.3m from 3 contracts.

• Moving forward, VLB is equipped with an outstanding orderbook of RM947.4m across all 3 segments that will provide strong earnings visibility until 2026. The outstanding orderbook represents a solid orderbook-to-cover ratio of 5.5x against FY21 revenue of RM171.1m. Meanwhile, we gather that tenderbook is relatively healthy at approximately RM2.07bn, comprising a mixture of design and build (55.2%) and build (44.8%) segment.

• Meanwhile, VLB will focus onto projects of larger size with valued above RM200.0m as it provides greater economies of scale. The group also aims to target more government-related social projects from the Ministry of Defence (MinDef) and Ministry of Public Works for infrastructure projects, such as public government offices, schools, hospitals, police and army facilities. Government social projects traditionally offer better and quicker collection of payments.

Valuation

• At an IPO offer price of RM0.33, VLB’s forward PE valuation for FY22f and FY23f stands at 14.0x and 9.2x, based on our estimated FY22f and FY23f core EPS of 2.4 sen and 3.6 sen respectively. We arrived our fair value of RM0.43 (30.3% potential upside from its IPO price) by assigning a target PE of 12.0x to its FY23f EPS.

• The assigned target PE represents a slight discount to Bursa Malaysia’s construction sector forward PE of 13.1x for 2023f. The discount is premised to VLB’s smaller market capitalisation.

• We like VLB for its established track record in the construction sector over the past 11 years and is currently backed by a solid outstanding orderbook of RM947.4m across all 3 segments that will provide strong earnings visibility until 2026. We also favour VLB for its better-than-average net margins position against selected sectorial peers and have delivered double-digit ROE over the years.

• While VLB does not adopt a formal dividend policy, we note that the group has been operating at a net operating cash flow over the years (with the exception of FY20) under review. We reckon that preserving capital for future expansion to undertake additional projects and enhance project efficiency will be the key focus for the time being.

Source: Mplus Research - 30 Jan 2023