Investment Merits

• Experienced contractor in building townships

• Long term relationships with clients to sustain job replenishment

• Ample net cash pile to gear up for future projects

Company Profile

Kumpulan Kitacon (Kitacon) is a building construction contractor for  residential and non-residential buildings. As a main contractor, the  group is responsible for the overall project. This includes project  planning and management, appointment of subcontractors,  procurement of labour and materials, and monitoring the entire building  construction process to ensure timely completion up to project  handovers to customers.  Residential buildings mainly comprise landed properties such as  terrace, semi-detached, detached, as well as cluster houses and  townhouses. Non-residential buildings include commercial  developments such as shop offices, shopping malls, industrial, and  purpose-built (eg sales galleries and clubhouses) and institutional  buildings such as schools.

Highlights

A trusted township builder. Kitacon has established a long-term  business relationship with its customers. Out of its top five customers  for FY21, three have been dealing with Kitacon for over 10 years ie  renowned property developers such as Sime Darby Property, SP Setia,  and Worldwide Group. Most of the group’s projects revolve around  landed residential property, which contributed 86% of FY22 revenue,  mainly for townships.

Kitacon’s outstanding construction orderbook as at 31 Dec 2022  stood at approximately MYR821m. Subsequently from 1 Jan to 14 Feb  2023, the group secured three new orders worth c.MYR379.2m,  comprising of two new residential projects and one new industrial  project with a contract value of MYR151.4m and MYR227.8m. As such,  the total outstanding orderbook as at 14 Feb stands at c.MYR1.2bn – translating into an orderbook-to-revenue cover ratio of 2.5x based on  FY22 revenue. Its specialisation in township construction with long term  clients provides opportunities for the group to continue bidding for  contracts for various parcels across different phases within the same  township development, as well as the same group of customers.  Moreover, tender entries are done throughout the year and hence, it  would be able to tender based on the prevailing material prices, limiting  exposure to fluctuations in material prices.

High quality of workmanship. From 2018 up to 30 Nov 2022, 31 out  of Kitacon’s total of 41 QLASSIC (Quality Assessment System in  Construction) assessments achieved a minimum score of 80%, which is  higher than the average QLASSIC score of approximately 69% in 2019 and 71% in 2020 published by the Construction Industry Development Board (CIDB). Such scoring attributes make Kitacon a preferable option among property developers. QLASSIC is a system introduced by CIDB to measure and evaluate the quality of workmanship of building construction work, based on the Construction Industry Standard.

Strategic focus in Selangor an advantage. Aside from having an emphasis on landed townships, which are still in demand, the majority of Kitacon’s projects are in Selangor – with projects in the state contributing over 80% of total revenue. This could enable the group to ride on the state’s GDP growth whereby the Selangor Government projected a GDP growth rate of 6.5-7% annually from 2021-2025 under the First Selangor Plan. This forecasted growth rate is much higher than the 12th Malaysia Plan’s (2021-2025) forecasted annual GDP growth rate of 4.5-5.5%

Company Report Card

Results highlight. FY22 revenue increased 7.1% YoY to MYR488m  from MYR456m, backed by higher progress billings for residential and  non-residential projects. FY22 core earnings remained flat YoY at  MYR38m – after excluding non-recurring items such as the gain on  disposal of investment properties worth MYR6.9m, amongst others.

Reasonable net cash position. The group has a net cash pile of  MYR75.7m as at 31 Dec 2022. Kitacon’s current balance sheet capacity  should allow it to gear up for more jobs ahead, not just for landed  residential projects but also industrial properties.

Dividends. For FY22, the group declared a DPS of 2 sen implying a  dividend payout ratio of 26.5% for its shareholders prior to listing.  Historically, Kitacon has been distributing at least 50% of its earnings to  its shareholders from FY19 to FY21. Post listing, Kitacon has an  intention to distribute at least 25% of profits to shareholders which we  believe is plausible given its track record.

Management. Managing Director, Tan Ah Kee helms Kitacon and cofounded the company back in 1990, when it focused on various small  scale construction and subcontracting works. He has been involved in  the construction industry since 1984. Helping him is the COO, Gam  Boon Tin and the CFO, Goh Yin Huat, both of which have over 15 years  of experience in the industry.

Investment Case

Valuation. Fair value of MYR0.97 based on 10x FY24F P/E. The  multiple of 10x is justified as it reflects a c.20% small-cap discount to  the Bursa Malaysia Construction Index’s 5-year mean P/E of 12x.  Moreover, the valuation target is within the 8-10x ascribed to small- to  mid-cap construction players under our coverage. We also believe that  the multiple ascribed is justified, given: i) Kitacon’s high quality of  workmanship demonstrated through the QLASSIC score; ii) long-term  customers comprising of highly reputable property developers; and iii)  the absence of Government related projects which are prone to policy  reviews.

Source: RHB Securities Research - 16 May 2023