Central Global Berhad: A Growth Mirage or Value Opportunity?

The stock market often rewards companies with strong revenue growth, but what happens when that growth fails to translate into consistent profits? Central Global Berhad (KLSE:CGB), a Malaysian commercial services firm, offers a case study in this disconnect. Despite a reported 11.23% average annual revenue growth over five years, the company's net profit has swung wildly—from losses exceeding RM40 million to razor-thin profits—and its P/E ratio now sits at 124.91, a stark warning for investors. Let's dissect whether the stock's valuation is justified or if risks like shareholder dilution and volatile earnings make it a dangerous bet.

Revenue Growth: A Rocky Road

Central Global's revenue trajectory is marked by extremes. After a modest RM120.56 million in 2020, revenue surged 91% in 2022 to RM203.9 million on infrastructure projects like Malaysia's Pan Borneo Highway. However, 2024 saw a 72% collapse in revenue to RM61.75 million, leaving the company reliant on cost-cutting to eke out a RM0.35 million profit.

This volatility raises red flags. The company's revenue growth, while cited as 41% annually over the next three years by analysts, depends on executing RM5.6 billion in bid projects. Yet, past performance shows that project-based revenue is fickle—a single failed contract could derail plans. With gross margins plummeting from 16.37% in 2022 to 2.66% in 2024, the path to sustained profitability is far from clear.

Profitability: A Fragile Recovery

Central Global's net profit has been a rollercoaster. After a RM40.1 million loss in 2023, the company clawed back to profitability in 2024 by slashing expenses—operating costs dropped from RM30.54 million to RM17.01 million. However, this “recovery” is built on sand. The 2024 EPS of RM0.06 is barely above breakeven, and the company's free cash flow remains negative, averaging -55.23% of revenue since 2020. With RM730 million in unbooked orders, the company must deliver on these projects to stabilize margins—a high bar in a cyclical industry.

Valuation: Overpriced Optimism?

The stock's 124.91 P/E ratio as of June 2025 reflects extreme optimism. At this valuation, investors are betting on a turnaround to earnings of RM0.10 per share by 2026, but the company has never sustained such levels. Compare this to the industry's 19% growth forecast—Central Global's 41% revenue target may be aggressive, and its ROE of just 4.91% underscores weak capital efficiency. The disconnect between valuation and fundamentals is stark: a market cap of RM680 million contrasts with cumulative net income of -RM46.3 million since 2020.

Balance Sheet Risks

The company's balance sheet adds to the caution. Shares outstanding rose 68% from 371 million to 624 million between 2020 and 2024, signaling potential dilution. Meanwhile, directors like Mr. Chew Hian Tat have engaged in frequent share transactions—a red flag for governance concerns. With RM799.78 million in enterprise value, the company's leverage to debt or equity raises questions about its ability to weather another revenue slump.

Shareholder Dilution and Volatility

Two risks loom largest: 1. Shareholder Dilution: The rising share count and insider trading activity suggest management may prioritize liquidity over long-term value, diluting existing shareholders. 2. Share Price Volatility: The stock's 52-week range of RM0.80–RM1.41 reflects investor uncertainty. A P/E of 125 offers little margin of safety if earnings falter again.

Investment Verdict: Proceed with Caution

Central Global Berhad's story is one of potential but precarious execution. While its niche in high-temperature masking tape (80% market share) and infrastructure projects offers growth hooks, the path to profitability remains littered with risks:- Revenue Reliance: Project-based revenue is inherently unstable.- Margin Pressures: Gross margins have halved since 2022, signaling pricing or cost challenges.- Valuation Overreach: The stock trades at a premium to its meager earnings.

For investors, the math is unkind. At current prices, even achieving RM0.20 EPS by 2026 would still leave the P/E at 62.45—a stretch given historical volatility. Avoid this stock unless there's a clear, consistent profit trajectory. Instead, wait for signs of margin stabilization, reduced share dilution, or a P/E contraction to single digits. Until then, Central Global's “growth” is more mirage than opportunity.

Final Note: Monitor RM5.6 billion project wins and gross margin trends closely. Until those metrics improve, the risks outweigh the rewards.