• FV of MYR0.22 on 13.5x CY24F P/E. Glostrext intends to raise MYR20.1m from its IPO primarily for working capital and business expansion in Singapore, repay borrowings as well as R&D to enhance operational efficiency and increase margins. We expect its forecasted 3-year earnings CAGR of 18.9% to be backed by better construction job flow in Malaysia and Singapore which translates to the need for more of Glostrext’s expertise in geotechnical instrumentation.

• Glostrext boasts over 30 years of operating experience in Malaysia and 14 years in Singapore. Notable clients include Sunway Geotechnics (M), a subsidiary of Sunway Construction (SCGB MK, BUY, TP: MYR2.05), Pintary Foundations, a subsidiary of Pintaras Jaya (PINT MK, BUY, TP: MYR1.94) and Econpile (ECON MK, SELL, TP: MYR0.14), among others. Significant completed projects include Merdeka 118, Sengkal Mall in Singapore, and Naga 3 Integrated Entertainment Complex in Cambodia. Involvement in these projects demonstrates the group’s expertise in pile instrumentation and static load test (PISLT) as well as structural and ground instrumentation and monitoring (SGM) services.

• Expansion in SGM business. IPO funds raised are mainly used for its SGM business expansion in Singapore. About MYR11.7m (or 58.2%) of the total IPO proceeds will be utilised for its business expansion (equipment purchase, hiring professionals) and working capital. Meanwhile, MYR1.8m (or 9.0%) will be dedicated to fund R&D initiatives to promote automation, such as enhancing Glostrext’s WiNA platform – a real-time monitoring platform – which could further expand margins and facilitate off-site SGM services. The existing WiNA platform has managed to improve operational efficiency and decrease dependence on manual labour. The SGM segment’s GPM rose to c.62% in FY23 (Mar) from c.52% in FY22. Completion of the improvements in the WiNA platform is anticipated to lead to further margin expansion and earnings growth.

• We estimate Glostrext’s core earnings to increase by c.39%, 9% and 11% YoY in FY24F-26F. This is in tandem with the recovery pipeline in construction sector, business expansion in Singapore and foreseeable increase in PILST demand amid the increase in safety awareness among contractors. Recurring net profit margin is expected to be at 24.4-25.1% in FY24F-26F, taking into account of implementation of the WiNA platform.

• Valuation. We ascribe a FV of MYR0.22 based on 13.5x CY24F P/E. For peer comparison purposes, we chose companies involved in piling works, eg SCGB, PINT, ECON. Our 13.5x P/E is derived by applying a 16% discount to the chosen peers’ market cap weighted average 16x P/E, due to its much smaller market capitalisation. We believe the valuation is justified, backed by the recovery in the overall construction sector and potential pipelines in infrastructure projects to be rolled-out in Singapore and Malaysia.

• Key risks include lower-than-expected service engagements, unexpected delays and loss of key management personnel.

Source: RHB Securities Research - 2 Aug 2023