AB Builders Group Limited
AB (‘Group’) is engaged in construction activities in Macau. It
generates revenues from fitting-out works (60-85% of revenues) and structural
works (15%-40%) for government as well as private sector customers.
Covid-19 has suspended construction activities and brought a halt to tenders
of new projects in Macau.
The group’s revenues declined almost 40% to $274m and incurred losses of
$7m. Average revenues and earnings over the last five years were around $300m
and $30m respectively. Operating cash flows averaged $18m due to heavy working
capital investments, and free cash flows averaged over $16m/year.
The financial position is strong with net cash of $183m. The group
raised $61.2m net of fees at $0.67/share in 2018 in an IPO. Of this, $24.7
remained unutilized – to be used primarily for financing operations and $6.1m
for potential acquisition candidates in the construction field operating in the
Guangdong-Hong Kong-Macau greater bay area. (In September, the group acquired a
related party company in the air purification business for $80,000 and agreed
to lend it $4m - and committed a further $5m - for working capital needs.)
The net current asset value is $183m. This included overdue unprovided
receivables of $23m. Subtracting this results in a proxy for liquidation value
of $160m.
Net tangible assets are $234m, which includes $43m of buildings (at
cost) with a 32-year lease term.
The stock is selling for $138m or $0.23/share. This is at a modest discount
from liquidation value and less than five times average earnings. Management
have been irregular and stingy with dividends and repurchases, returning $8m last
year and nothing this year. They have also engaged in somewhat questionable
related party transactions (see above) though they’re not completely unrelated to the
group’s business.
There’s no reason to believe construction activity in Macau won’t return
to normal in the long future, and for the business to regain its average
earning power.
Therefore, this appears to us to be a modestly priced stock – not the
best of bargains, but not entirely unsatisfactory in attractiveness.