Is Tuju Setia Berhad (KLSE:TJSETIA) a Viable Long-Term Investment Despite Its Low ROE and High Debt?

The Malaysian construction sector is undergoing a transformative phase, driven by government-led infrastructure projects, urbanization, and a surge in private-sector investments. Amid this backdrop, Tuju Setia Berhad (KLSE:TJSETIA) has emerged as a key player, securing high-profile contracts and expanding its order book. However, its financial metrics—namely a low Return on Equity (ROE) of 4.79% and a debt-to-equity ratio of 5.48—raise critical questions about its long-term viability. This article evaluates whether Tuju Setia's strategic initiatives and the sector's growth potential can offset its current financial weaknesses.

Financial Metrics: A Tale of Leverage and Efficiency

Tuju Setia's ROE of 4.79% in Q2 2025 lags behind the Malaysia construction sector's median ROE of 5–12%, as highlighted by industry benchmarks. This suggests the company is underperforming in converting shareholder equity into profit. The ROE is further constrained by a profit margin of just 0.62%, significantly below the sector median of 2.9%. Meanwhile, the company's debt-to-equity ratio of 5.48 indicates a heavy reliance on debt financing, which amplifies financial risk.

Yet, Tuju Setia's interest coverage ratio of 22.55 offers a silver lining. This metric, which measures the company's ability to service debt, is robust, suggesting that even with high leverage, the firm can comfortably meet interest obligations. This is critical in a capital-intensive industry where debt is often a necessary tool for scaling operations.

Sector Dynamics: Growth as a Mitigating Factor

Malaysia's construction sector is projected to grow by 6% in 2025, fueled by a MYR58.8 billion pipeline of projects, including the MRT3 Circle Line and Pan Borneo Highway. Government allocations in the 2025 Budget—MYR64.1 billion for education, MYR45.3 billion for health, and MYR16 billion for energy—underscore the sector's strategic importance. These investments are expected to drive demand for construction firms like Tuju Setia, particularly in residential and infrastructure segments.

The New Industrial Master Plan 2030 (NIMP 2030) and Construction 4.0 initiatives further position the sector for digitalization and sustainability, aligning with global trends. For Tuju Setia, this means opportunities to bid on smart infrastructure projects and adopt technologies like Building Information Modelling (BIM) to enhance efficiency.

Strategic Initiatives: Order Book and Leadership

Tuju Setia's recent wins, including a RM264 million contract for Residensi Naluri and a RM389 million project for Milla Residence, have boosted its order book to RM2.1 billion. These projects, located near transit hubs and educational institutions, cater to urbanization trends and are expected to generate steady cash flows through 2028. The company's appointment of a new CEO and COO in 2025 also signals a focus on operational efficiency and leadership stability.

However, the company's earnings per share (EPS) has been diluted by a 10% increase in shares outstanding over the past year, reducing shareholder value. While the recent Q2 2025 profit of MYR 492,000 (down 73.29% YoY) is a positive, it masks underlying challenges in maintaining consistent profitability.

Risk vs. Reward: A Calculated Bet

The key question for investors is whether Tuju Setia's growth potential can offset its current financial weaknesses. The company's high debt load increases vulnerability to interest rate hikes or project delays, while its low ROE suggests inefficiencies in capital allocation. However, the construction sector's tailwinds—driven by government spending and urbanization—provide a buffer.

For instance, the MRT3 Circle Line alone is expected to inject billions into the economy, creating opportunities for firms with transit-oriented expertise. Tuju Setia's Residensi Naluri and Milla Residence projects, both near MRT stations, position the company to capitalize on this trend. Additionally, the firm's focus on high-margin infrastructure and logistics projects could improve its ROE over time.

Investment Thesis: A High-Risk, High-Reward Proposition

Tuju Setia's stock (KLSE:TJSETIA) has underperformed in recent quarters, with a 73.29% YoY decline in net income and a diluted EPS. However, its strategic alignment with Malaysia's infrastructure boom and a robust order book offer long-term upside. Investors must weigh the risks of high leverage against the potential for earnings growth from its project pipeline.

For risk-tolerant investors, Tuju Setia could be a speculative play on Malaysia's construction renaissance. However, conservative investors may prefer firms like GDB Holdings Berhad, which maintains a debt-free balance sheet and a ROE of 23.44% (as of Q2 2025).

Conclusion: A Cautious Optimism

Tuju Setia Berhad is not without flaws—its low ROE and high debt are red flags. Yet, in a sector poised for 6% growth in 2025 and beyond, the company's strategic projects and leadership changes could catalyze a turnaround. Investors should monitor its ability to convert its RM2.1 billion order book into consistent earnings and reduce its debt burden. For now, Tuju Setia remains a high-risk, high-reward bet, suitable for those willing to ride the wave of Malaysia's construction renaissance.