Vertice Bhd (“Vertice”) is set to return to profitability following the streamlining of its business operations to focus on construction division as we expect more positive job flows from the group moving forward. Recommend BUY with a target price of RM1.08 based on 12x PER FY20 as per the Bursa Construction Index.

Vertice’s investment merits remains attractive from its alliance with Consortium Zenith Construction Sdn Bhd (“CZC”) which is the main contractor of the Penang Mega Infrastructure Project. To recap, the RM6.3bn project comprises of four construction work packages including three major roads and one undersea tunnel projects. Vertice, which currently owns 13.21% of CZC has secured package 2 for the construction of a by-pass from Bandar Ayer Hitam connecting to Lebuhraya Tun Dr. Lim Chong Eu with a contract sum worth RM815m, expected to kick start by end-Oct 2019.

Including the flagship project, this has brought the group’s total outstanding orderbook to circa RM1bn. With Vertice’s investment on CZC, we believe the group is at a stronger footing being one of the few potential players to be awarded the remaining work packages of the Penang mega infrastructure project.

As a part of its business restructuring, Vertice is expected to record better financial numbers following the disposal of its 60% equity interest of non-performing fashion retail subsidiary, Kumpulan Voir. Additionally, the group has also undertaken a major private placement exercise, raising fresh capital of RM40.08m providing stronger balance sheet to fund the growing construction division which will transform Vertice to a serious construction player.

Vertice’s balance sheet remains healthy with near zero gearing level and a net cash position of RM4.9m. With management’s effort to streamline their business operation, we expect the earnings catalyst to be driven by construction projects on the back of stronger orderbook moving forward from Penang infrastructure spending.

Source: Rakuten Research - 3 Sept 2019