Able Engineering Holdings Limited

Able Engineering (‘Company’) is engaged primarily in building construction works focused exclusively in Hong Kong.

It specializes in executing public sector contracts for housing and hospitals. Three customers accounted for 87% of its revenues.

The social unrest in Hong Kong and political wrangling over funding affected the progress of tenders and awards of public sector projects in the recent financial year. Further, Covid-19 caused suspension in site works this year. Moreover, the company decided to demolish and re-build its investment property resulting in a loss of $7m/year in rental income for the time being.

The company accounts for revenue using the output method based on customer certifications of contract progress.

The company reported revenues of $1.5b in the last financial year, which declined from $2.4b in 2019 (representative of the recent past). Operating earnings before depreciation and taxes fell correspondingly to $100m from $190m in 2019.

The balance sheet was strong with excess cash of $553m and strong ability to satisfy its obligations.

The company has orders in hand worth $7.5b to be satisfied over the next four years. It also has a 30% interest in a joint venture that has $9.5b in orders. This indicates that past average revenues of $2.4b may be maintained. This translates to about $100m in net profits based on past performance.

The stock is currently selling for $880m or just under 9x earnings. Net of cash, it sells at just over 3x earnings.

However, the company is on the lookout for acquisitions to utilize this cash – albeit in related businesses. It pursued a recent acquisition worth $130m to obtain space to manufacture building components to supplement its contract works business.

Management suspended dividend payments this year and has been irregular in the recent past - averaging just $40m in the last six years, which is less than a 5% average yield. The cash hoard appears excessive to justify such a suspension and doesn’t indicate high shareholder orientation.

The company’s own dividend policy states “actual and expected financial performance of the group” as a consideration for dividend payouts. In this regard, the dividend suspension says something about management’s view of the company’s prospects.

Considering the concentrated and lumpy nature of the business, and the limited shareholder orientation, we don’t consider the valuation to be cheap enough at 9x earnings relative to other opportunities available in the market today (and analyzed on this blog).