Haily Group Berhad: Sector Tailwinds Can't Mask Declining Efficiency and Share Dilution Risks

Malaysia's construction sector is booming, fueled by infrastructure spending, urbanization, and government initiatives. Yet Haily Group Berhad (KLSE:HAILY), a player in building construction and durian farming, faces headwinds of its own: a sharp decline in return on capital employed (ROCE) and dilutive equity issuances that threaten to undermine its growth narrative.

Sector Momentum vs. Internal Struggles
The construction sector has been a growth engine in 2025. Public projects like the Penang LRT and Pan Borneo Highway, along with private developments in residential and industrial sectors, have driven a 16.6% year-on-year jump in Q1 construction work done. . Haily, however, is failing to capitalize on this momentum.

ROCE Decline: A Red Flag for Capital Efficiency
ROCE, a key metric for assessing how effectively a company uses capital, has halved for Haily over five years, dropping from 27% to 13% by 2023. Even in 2025, the trend continues. This decline suggests that the company's expanding capital base—driven by growth in assets like machinery and land—is not yielding proportional returns.

While revenue grew 29.4% annually over five years, the ROCE drop indicates diminishing returns. For instance, despite securing MYR 128 million in contracts in 2024–2025, the company's trailing twelve-month EBIT remains at MYR 10 million, unchanged since 2023. This raises questions about whether Haily's strategy of scaling up through capital-intensive projects is sustainable.

Dilutive Share Issuances Undermine Shareholder Value
Haily's efforts to fund growth have included aggressive equity issuances. In September 2024, it issued 196 million free warrants, diluting existing shareholders. While the company declared dividends in 2024–2025, the payout ratio has shrunk: the latest interim dividend of 0.33 sen per share is half the level seen a decade ago.

The stock's 12.77% annual decline since July 2024 reflects investor skepticism. With a market cap of MYR 86.7 million, even modest further dilution could pressure valuation multiples further.

Why the Sector Tailwind Isn't Enough
While Malaysia's construction sector is projected to grow 12% in 2025, Haily's challenges are self-inflicted. Its liabilities-to-assets ratio of 53% highlights reliance on short-term debt, raising liquidity risks. Meanwhile, peers like Gamuda and WCT Holdings, which maintain healthier ROCE and capital structures, are better positioned to capture sector opportunities.

Investment Considerations
- Risks: Declining ROCE suggests poor capital allocation, while dilutive issuances weaken shareholder returns. High leverage adds vulnerability to interest rate hikes or project delays.
- Opportunities: The company's MYR 90 million contract wins and new subsidiary formation hint at potential, but execution is key.
- Advice: Avoid HAILY unless management demonstrates improved ROCE through cost discipline or higher-margin projects. Investors should instead focus on sector peers with stronger balance sheets.

In conclusion, while Malaysia's construction boom provides tailwinds, Haily Group Berhad's declining efficiency and shareholder dilution strategies cast a shadow over its growth story. Until these issues are addressed, the stock remains a risky bet.