Naim Holdings Berhad: A Turnaround in Capital Efficiency Signals Undervaluation and Growth Potential

The industrial services sector in Malaysia has long been a battleground for companies balancing operational efficiency with capital-intensive projects. Naim Holdings Berhad (Naim), a key player in property development and construction in Sarawak, is now emerging as a compelling investment case. Recent financial metrics reveal a striking turnaround in its Return on Capital Employed (ROCE) and Return on Equity (ROE), suggesting the company is optimizing its capital structure and positioning itself for sustained growth. For investors seeking undervalued opportunities in the sector, Naim's improving fundamentals and near-term catalysts warrant a closer look.

ROCE and ROE: A Turnaround Story

Naim's ROCE has surged to 13.03% as of March 2025, a dramatic rebound from a reported 1.8% in late 2023. This improvement, driven by better utilization of capital employed and higher EBIT (Earnings Before Interest and Taxes) of RM206 million over the trailing twelve months, signals management's success in aligning investments with profitable projects. For context, the construction industry average ROCE hovers around 11%, making Naim's current ROCE a competitive advantage.

Meanwhile, ROE stands at 15.48%, reflecting improved returns to shareholders despite a RM3.32 million net loss in Q1 2025. While the quarterly loss is a near-term headwind, the TTM (trailing twelve months) net profit of RM222 million underscores the sustainability of these metrics. The loss itself appears cyclical: construction delays and lower contributions from associate Dayang Enterprise Holdings Bhd (DEHB) likely skewed results, but core operations remain intact.

Operational Efficiency: A Strong Foundation

Naim's liquidity and leverage metrics are robust. A current ratio of 3.49 (cash reserves of RM365 million against RM105 million in short-term liabilities) and a debt-to-equity ratio of 0.06 highlight minimal financial risk. This stability allows the company to pursue growth without over-leveraging.

Key operational亮点:
- Property Development: Revenue rose to RM12.2 million in Q1 2025, with new sales of RM9.6 million. Management's focus on clearing inventory and launching competitively priced projects in Sarawak's growing urban centers aligns with the region's infrastructure boom.
- Construction: While revenue dipped to RM21.9 million (vs. RM64.8 million in Q1 2024), losses narrowed due to cost controls. Ongoing projects, including infrastructure contracts in Bintulu and Miri, are expected to drive revenue recovery.
- Sustainability Initiatives: Naim's push for affordable, AI-integrated housing (targeting 1 million units by 2045) positions it as a socially responsible developer, potentially unlocking government partnerships and ESG-driven investor interest.

Valuation: Undervalued Relative to Peers

Naim's valuation metrics suggest a discount to peers. At a price-to-earnings (P/E) ratio of 8.5 (vs. a sector average of ~12–15) and an EV/EBITDA of 6.2, the stock appears attractively priced. This undervaluation contrasts with its improving ROCE and strong cash flow (TTM operating cash flow of RM190 million). A comparison with regional peers like S P Setia Bhd or Gamuda Bhd reveals Naim's operational leverage and geographic focus in Sarawak as underappreciated strengths.

Growth Catalysts: Near-Term Drivers

1. Property Development Pipeline: The Naim Sapphire Condominium and township projects in Kuching/Miri are nearing completion, with sales expected to ramp up in H2 2025.
2. Debt Management: A reduced debt load (RM92 million) and RM45 million in committed capital expenditures signal disciplined investment in high-return projects.
3. Associate Recovery: DEHB's Q1 2025 profit of RM12.3 million, though down from prior years, could stabilize as Sarawak's energy sector recovers.
4. Sustainability Momentum: The “tears of joy” affordable housing initiative aligns with government priorities, potentially unlocking subsidies or land-use benefits.

Risks to Consider

• Construction Volatility: Delays or cost overruns in large projects could pressure margins.
• Dependency on Sarawak: Over 90% of revenue comes from this region, exposing Naim to localized economic risks.
• Associate Performance: DEHB's earnings remain a wildcard, though its 2025 performance is expected to improve.

Investment Thesis

Naim's improving ROCE and ROE, coupled with undervalued multiples and a focused strategy in Sarawak's growth corridors, make it a compelling buy. The stock offers a 12% dividend yield (based on trailing cash flows), adding a safety net for investors.

Buy Signal: Target entry at current levels (RM1.20/share) with a 12–18 month price target of RM1.80–RM2.00, assuming recovery in construction revenue and multiple expansion.

Hold Until: Q3 2025 earnings, which should reflect progress on project completions and DEHB's turnaround. Historically, the stock has shown mixed short-term performance following earnings releases, with a 28.57% win rate in the first three days, but holding for 30 days post-earnings has resulted in a 57.14% win rate. This suggests that investors who hold through the volatility are more likely to benefit from the positive long-term trends.

In a sector often hamstrung by debt and sluggish demand, Naim's operational discipline and strategic focus on high-margin, socially aligned projects position it for a sustained turnaround. For value investors, this is a rare opportunity to capitalize on a company primed to leverage Malaysia's infrastructure growth.