BNASTRA: Construction Firm Exceeds Expectations on Cost Efficiency, Target Price Raised

The construction sector is seeing positive momentum as a prominent firm is poised to report stronger-than-expected earnings for the fourth quarter of FY26, with full-year results anticipated to surpass earlier forecasts. This robust performance has led to an upward revision of its FY26-27E earnings per share (EPS) forecasts by 2-9%.

Performance Highlights and Drivers

The projected strong year-on-year (YoY) growth for 4QFY26 is largely attributed to a significantly expanded order book. Analysts note that the company has successfully frontloaded progress billing assumptions and reflected higher actual new contract wins, which reached a record RM4.1 billion in FY26. However, quarter-on-quarter (QoQ) earnings for 4QFY26 are expected to moderate to RM35-40 million. This QoQ softness is primarily due to several newly secured projects being in their nascent stages of execution, where progress billings have yet to fully ramp up. Management is committed to maintaining its semi-annual dividend payout, with a dividend for 4QFY26 remaining at 4 sen per share. The firm’s competitive advantage, particularly its status as a preferred contractor for key clients and superior profit margins, are significant drivers of its sustained performance.

Focus on Execution and Future Outlook

With its outstanding order book swelling to a record RM7 billion, up from RM3.6 billion a year ago, the emphasis is now firmly on execution and project delivery. The company is targeting RM2.5 billion in new contract wins for FY27E, following its record-breaking FY26 replenishment. Future contract opportunities are anticipated from new residential clients in the Klang Valley and Johor, as well as potential data centre (DC) awards. Johor specifically remains a crucial growth area, contributing approximately 40% of the current outstanding order book, with potential additions of RM500 million from CPI’s land in Tampoi and further opportunities from EXSIM’s 6-acre landbank in Johor Bahru. Additionally, the 51%-owned subsidiary, LF Lensen, is expected to deliver RM15-20 million PAT in FY27E, providing further earnings upside.

Challenges and Risks

Despite the positive outlook, the firm faces some challenges. FY28E EPS forecasts have been moderately revised downwards by 6% due to a lower-than-expected order book replenishment of RM2.5 billion for FY27E. Furthermore, the net profit margin is projected to moderate to 7.2% in FY27E (from 8.3% in FY26) due to a higher mix of DC projects and increased sub-contracting requirements. Key downside risks include delays in progress billings, slower-than-anticipated order book replenishment, and potential cost overruns.

Investment Rating and Target Price

Analysts reiterate a BUY rating for the stock, with a higher 12-month target price of RM2.66, up from RM2.60. This revised valuation is based on an unchanged target 16x Price-to-Earnings (PE) multiple applied to the updated FY27E EPS. The stock is currently trading at an undemanding 12x FY27E PE, representing a significant 30% discount to the construction sector’s average PE of 16x, suggesting an unwarranted undervaluation given the firm’s increasing diversification beyond traditional residential projects.