Nestcon Bhd (NESTCON) is a construction specialist equipped with building construction and civil engineering & infrastructure projects expertise. The contractor is seeking to list on the ACE market today where bulk of the proceeds raised will be used to establish own on-side industrialised building system (IBS) facilities and acquire machineries & equipment to enhance efficiency and competency to expand construction portfolio. BUY with a target price of RM0.39 based on 13x PER FY22 as per the average valuation of industry peers.

NESTCON is a holistic contractor capable of buildings various type of buildings (residential, commercial, industrial and leisure) and involved in civil engineering and infrastructure works comprising of earthworks, roadworks and drainage works. In FY20, 58% of revenue is from building construction and 42% is derived from civil engineering and infrastructure segment. Moving forward, building segment will be the main contributor as the segment constitutes 73.5% of total unbilled orderbook. Earnings visibility is robust for next 3 years, underpinned by unbilled orderbook of RM1.2bn.

RM6.0m or 13.3% of the proceeds raised is allocated to set up own on-site IBS facility to produce precast products namely hollow core slabs, half slabs and precast bathroom units supplementing current aluminium formwork system. Undoubtedly, the IBS solutions enable reduction in labour dependency and delivery time while simultaneously improve quality, specifically for larger scale project. For instance, precast hollow core slabs that used concrete flooring for parking podium allows time reduction by 40% compared to conventional beam slabs.

Meanwhile, RM6.6m is utilised to purchase machines and equipment to cater for expansion in the civil engineering and infrastructure division. This is in line with NESTCON’s intention to improve construction profile especially for infrastructure works and the group intends to penetrate into earthworks and infrastructure works for large-scale solar photovoltaic projects. RM16.5m or 36.6% of the fund is earmarked to repay bank borrowings with expected annual interest savings of RM1.08m.

Notably, NESTCON’s tenderbook is at all-time high as the group is actively bidding for 51 projects worth RM2.8bn. Out of the RM2.8bn projects, 66% is for civil engineering and infrastructure projects. Post listing, gearing ratio will strengthen from 1.06x to 0.65x. NESTCON does not have a formal dividend policy and management intends to pay dividend moving forward. We forecast EPS growth of 11.3% and 20.2% for FY21 and FY22 respectively.

Source: Rakuten Research - 29 Jun 2021