• FV of MYR0.37 on 10x FY23F P/E. Vestland intends to raise MYR56.1m from the public issue of 170m new shares. These proceeds will mainly be  used to fund working capital, to further strengthen its design & build segment, which fetches greater added value in terms of better project  oversight and cost management. Future earnings should be anchored by  its diverse portfolio in private and government projects, spanning across the  residential (high-rise property) and non-residential (police camps and  warehouses) segments.

• Commendable orderbook growth prospects. The group has  MYR947.4m worth of work orders in hand as at 28 Nov 2022 (the latest  practicable date or LPD), translating into an orderbook/revenue cover ratio  of 5.5x (higher than the 3x mean for the stocks under our coverage) based  on FY21 revenue. Around 69% of its total outstanding orders are made up  of high-margin (c.3-5ppts higher than build-only projects in terms of gross  profit margin) design & build projects, followed by the build segment (23%) and civil engineering works (8%). Job replenishment prospects are backed  by the group’s tenderbook of MYR2.1bn (estimated success rate of 30- 35%) as at the LPD, of which 55.2% comprises design & build projects – these include industrial properties such as warehouses for Armani Group  and Sime Darby (SIME MK, BUY, TP: MYR2.80).

• Earnings estimates. We are projecting a 5-year earnings CAGR of 43.5%  for Vestland, largely in tandem with its stronger orderbook replenishment  and project mix. We think that Vestland should be able to retain its existing  clients and attract new ones, due to its capability in design & build construction services that command better margins. Recurring net profit  margins are expected to be at 8.1-8.5% in FY23-24, taking into account  yearly replenishment order assumptions of MYR750m for the period.

• Valuation. We ascribe a FV of MYR0.37, based on a target 10x FY23F P/E.  For peer comparison purposes, we chose small to mid-cap construction players such as, Kerjaya Prospek (KPG MK, BUY, TP: MYR1.44), MGB  (MLG MK, BUY, TP: MYR0.64), Gabungan AQRS (AQRS MK, BUY, TP:  MYR0.46), and Inta Bina (INTA MK, NR). We believe that this target  valuation of 10x is justified, as it is within our range ascribed to the majority  of small to mid-cap contractors under our coverage. The target valuation, being at the high end of the 8-10x range ascribed to small and mid-cap  contractors, takes into consideration its earnings growth potential of over  50% YoY in FY23F, backed by better job replenishment prospects – particularly for the design & build segment.

• Key downside risks: Being dependent on foreign workers, fluctuation in  the prices of building materials, disruptions in operations due to COVID-19,  and the loss of key management personnel.

Source: RHB Securities Research - 12 Jan 2023