Southern Score Builders - Profiting From Lean Operation

Date: 
2023-08-02
Firm: 
KENANGA
Stock: 
Price Target: 
0.22
Price Call: 
BUY
Last Price: 
0.40
Upside/Downside: 
-0.18 (45.00%)

A management contractor focusing largely on high-rise residential building jobs in Kuala Lumpur, Southern Score Builders Bhd (SSB8) commands strong margins by outsourcing construction work to reliable subcontractors, and procuring building materials in bulk (and often in cash terms) at highly competitive rates. An outstanding orderbook of RM638.5m should keep this lean construction outfit busy over the next 2-3 years. We value the company at RM0.22 based on 13x FY24F PER. ADD.

A high-rise turnkey contractor. The company came into being in Nov 2022 via the reverse takeover (RTO) of G Neptune Bhd by privatelyowned Class G7 contractor Southern Score Sdn Bhd with a profit guarantee of RM80m over 2022-2024. It focuses mainly on high-rise residential building jobs in Kuala Lumpur, and civil works i.e. road and drainage, and water reticulation and sewerage package works.

Completed RM738m worth of projects. Its first construction project was in 2015, as a turnkey contractor for the development of PR1MA Jalan Jubilee. As of Mar 2023, it has so far completed a total project value of RM738m, of which RM533.5m were from related party – Platinum Victory (which is co-founded by Tan Sri Datuk Seri Gan Yu Chai, the MD of SSB8). Meanwhile, it has current outstanding orderbook of RM638.5m (RM111.7m are related party’s projects) with tender book of RM634.0m. This should keep them busy for the next 2- 3 years.

Lean and asset-light. SSB8 registered strong gross margin of c.20% over FY19-FY21 (FYE Dec) and post the RTO, 19%-24% between 1QFY23 and 3QFY23. This was primarily due to its asset-light construction management model. It outsources construction work to reliable subcontractors at highly competitive rates. The procurement of building materials in bulk (and often in cash terms) backed by its strong balance sheet puts it in a strong position to ask for significant discounts from suppliers.

Exploring opportunity in IBS manufacturing. SSB8, through its 35%-owned associate TCS SS Precast Construction Sdn Bhd (TSPC), is currently exploring project viability and economic benefit of setting up IBS manufacturing plant in Batu Caves. SSB8 has already earmarked RM21.8m of the proceeds raised from the RTO exercise for this IBS venture. Meanwhile, in Jun 2023, SSB8 signed MoU with MCC Overseas (M) Sdn Bhd and Guangdong Bright Dream Robotics Co. Ltd with the intention to form a partnership to implement and develop robotic construction technologies in Malaysia. All this would help to improve its profit margin in the future should it materialises.

Expect earnings to grow steadily. We project FY23/FY24/FY25 net profit of RM31.4m/RM38.3m/RM42.4m. It has a strong balance sheet with only RM5.0m bank overdraft against RM114.5m cash, partly thanks to RM108.6m raised from a private placement of new shares during the RTO exercise.

We value SSB8 at RM0.22 based on 13x FY24 PER, at a discount to 14x-18x we ascribed to large and mid-sized infrastructure and building contractors (i.e., GAMUDA, IJM and SUNCON) but in line with building contractor (i.e., KERJAYA) given the oversupply situation in the building segment. There is no adjustment to our fair value based on ESG given a 3-star rating as appraised by us (see Page 3). ADD.

Source: Kenanga Research - 2 Aug 2023

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