Is Citaglobal Berhad's Earnings Growth Sustainable in Light of Its Low ROE?

Citaglobal Berhad (KLSE:CITAGLB) has captured the attention of investors with its remarkable earnings growth. Over the past five years, the company has delivered an average annual earnings growth rate of 50.7%, far outpacing the 22.1% industry average in the Construction sector. For the first quarter of 2025, its earnings per share (EPS) surged 40% year-over-year, from RM0.005 to RM0.007. Yet, this impressive performance is juxtaposed with a persistently low Return on Equity (ROE) of 3.8%, a figure that has remained stagnant since 2023 and lags behind the industry average of 9.0%. This raises a critical question: Is Citaglobal Berhad's earnings growth a sign of reinvestment efficiency, or does the low ROE signal underlying risks for long-term investors?

The Paradox of Growth and Profitability

Citaglobal Berhad's ability to grow earnings despite a weak ROE hinges on its aggressive reinvestment strategy. The company retains 72% of its profits to fund new projects and business expansion, a decision that has driven its high earnings growth. This approach is evident in its recent wins, such as the RM36.26 million subcontract for the Kuching Urban Transportation System, which aligns with Malaysia's infrastructure development agenda. However, the low ROE suggests that these reinvestments are not generating commensurate returns for shareholders.

The disconnect between growth and profitability can be attributed to two key factors: operating margins and asset turnover. While the company's net profit margin has improved from 3.8% in 2023 to 5.4% in 2025, its asset turnover ratio remains low at 0.46 (calculated as TTM revenue of RM290.68 million divided by total assets of RM668.94 million). This implies that Citaglobal Berhad is not efficiently utilizing its assets to generate revenue, a common issue in capital-intensive sectors like construction. The 0.46 figure also resolves the earlier conflicting data (e.g., the erroneously high 4.09 ratio likely stemmed from a miscalculation or misinterpretation of the metric).

Reinvestment Efficiency: A Double-Edged Sword

Citaglobal Berhad's reinvestment strategy has undeniably fueled growth, but its sustainability depends on the quality of these investments. The company's debt-to-equity ratio has improved significantly, dropping from 72.6% in 2020 to 22.4% in 2025, indicating a healthier capital structure. This reduction in leverage reduces financial risk and provides flexibility for future projects. However, the company's operating cash flow remains negative, suggesting that asset turnover and operational efficiency must improve to sustain reinvestment without relying on external financing.

The key to long-term success lies in projecting returns from current investments. Citaglobal Berhad's focus on high-margin contracts, such as renewable energy and urban infrastructure, could enhance profitability if executed effectively. For instance, its acquisition of stakes in companies like Ifactors Sdn. Bhd. and Nova Reeco Sdn. Bhd. signals a strategic pivot toward diversified revenue streams. Yet, the lack of clear metrics on the ROI of these ventures introduces uncertainty.

Risks for Long-Term Investors

While Citaglobal Berhad's earnings growth is impressive, the low ROE and asset turnover ratio highlight structural inefficiencies. A low ROE is often a red flag for investors, as it indicates that the company is not generating sufficient returns on the capital it has raised from shareholders. This is particularly concerning in a competitive sector where capital efficiency is paramount.

Additionally, the company's reliance on retained earnings for reinvestment exposes it to cyclical risks. If earnings growth slows due to economic headwinds or project delays, the ability to fund new initiatives could falter. The recent 43.05% year-over-year revenue growth in 2024 is encouraging, but the 4.22% decline in Q1 2025 revenue underscores the volatility inherent in construction and infrastructure projects.

Investment Implications

For investors, Citaglobal Berhad presents a high-risk, high-reward scenario. The company's earnings growth and strategic positioning in Malaysia's infrastructure boom make it an attractive candidate for those with a long-term horizon and tolerance for volatility. However, the low ROE and asset turnover ratio suggest that the company must improve operational efficiency to justify its valuation.

Key watchpoints for investors include:
1. Profitability Metrics: Monitor whether the net profit margin continues to expand and if the ROE shows signs of improvement.
2. Asset Utilization: Track the asset turnover ratio to assess whether reinvestments are enhancing revenue per asset.
3. Debt Management: Ensure that the company maintains its disciplined approach to debt reduction while funding growth.

In conclusion, Citaglobal Berhad's earnings growth is a testament to its aggressive reinvestment strategy and strategic project wins. However, the low ROE and asset turnover ratio highlight the need for improved capital efficiency. Investors who are willing to bet on the company's ability to execute its long-term vision and navigate sectoral challenges may find value in its shares—but caution is warranted. The path to sustainable growth will require a delicate balance between reinvestment and profitability, and the next few quarters will be critical in determining whether Citaglobal Berhad can bridge the gap between earnings growth and shareholder returns.