ACO Group Berhad's Earnings Decline: A Cautionary Signal in an Otherwise Resilient Trade Distributor Sector

The Trade Distributors sector has emerged as a standout performer in 2025, with industry-wide earnings growth of 15% year-over-year and a robust Return on Equity (ROE) of 11.1%. Against this backdrop of sectoral resilience, ACO Group Berhad's financials paint a starkly different picture. While the company's recent 55.6% year-over-year EPS rebound in FY 2025 offers a glimmer of hope, its long-term earnings trajectory—marked by a -8.7% annual decline over five years—and a stagnant ROE of 4.6% raise critical questions about its ability to align with industry benchmarks.

A Tale of Two Trajectories

The disparity between ACO Group and the broader Trade Distributors industry is stark. The sector's 11.1% ROE reflects efficient capital utilization and strong net income generation, whereas ACO's ROE remains a fraction of that level. This gap is not merely a function of macroeconomic headwinds but a symptom of poor capital allocation. ACO's Return on Capital Employed (ROCE) has plummeted from 22% five years ago to a meager 6.0% as of May 2024, underscoring its struggle to generate returns from invested capital. By contrast, the industry's ROCE of 7.8% highlights a collective ability to leverage assets more effectively.

Capital Allocation: A Weak Link

ACO's capital inefficiency is compounded by its reliance on equity financing. While reducing current liabilities to 36% of total assets—a move that lowers financial risk—it has also diluted the leverage that could amplify returns. The company's net profit margin of 3.3% in FY 2025, though up from 2.2% in 2024, remains far below the sector's 6.2% average revenue growth. This suggests ACO is generating profits at a lower rate relative to its sales, a red flag for investors.

The broader industry's success stems from disciplined capital deployment. Trade Distributors companies have prioritized operational efficiency and working capital optimization, driving a 6.2% annual revenue increase. ACO, however, appears to lack a coherent capital strategy. Its investments in growth—such as expanding into solar electrical supplies—have yet to translate into meaningful returns, with ROCE declining despite higher capital employed.

Strategic Realignment: Progress or Posturing?

ACO's recent leadership changes, including the appointment of Tan How Ching as Executive Director and Tan Yushan's redesignation to Group Managing Director, signal a pivot in governance. These moves, coupled with the resignation of its CFO in 2023 and a surge in new board members, suggest an attempt to inject fresh perspectives. However, strategic realignment requires more than executive reshuffles. The company's foray into renewable energy distribution is a step toward diversification, but its execution remains unproven.

Can ACO Reverse Its Trajectory?

The answer hinges on three factors:
1. Capital Efficiency: ACO must prioritize high-ROCE projects and streamline operations to close the gap with the sector. This could involve divesting underperforming assets or renegotiating supplier terms to reduce costs.
2. Strategic Focus: The solar industry expansion needs to be scaled rapidly. If ACO can capture market share in a high-growth niche, it may offset weaknesses in its core business.
3. Leadership Consistency: Frequent board turnover risks strategic drift. A stable leadership team with industry expertise is essential to drive long-term execution.

Investment Implications

For investors, ACO Group Berhad presents a high-risk, high-reward scenario. While its FY 2025 EPS rebound and strategic pivots offer hope, the company's capital inefficiency and weak ROE are hard to ignore. The Trade Distributors sector's outperformance—bolstered by a 24.7x PE ratio—suggests ACO's valuation discount may persist until it demonstrates sustained operational improvement.

A cautious approach is warranted. Investors with a long-term horizon might consider a small position in ACO if its strategic initiatives gain traction, but should allocate the majority of capital to the broader sector. For now, ACO's earnings decline serves as a cautionary tale: even in a resilient industry, poor capital allocation can drag down performance.

In a market where capital discipline separates winners from laggards, ACO Group Berhad must prove it can adapt—or risk becoming a long-term underperformer.