Shape Australia Corporation Limited (Shape, the Group, ASX: SHA) is a national fit-out and construction services business specialising in commercial properties. Its services include design and construction, fit-out and refurbishment, façade restoration and new builds. Sectors serviced range from commercial office, education, health, hospitality, retail, to defence. The Group has delivered 7,250 projects valued at $10 billion, over the past 35 years.
SHAPE is headquartered in Sydney, and listed on the ASX in December 2021, with an IPO price of $1.96. The closing price on the first day of trading was $2.01 a share.
Revenue recognition conservatively stated implies strong FY25
Historically, on average, Shape’s gross profit margins have improved towards the completion of projects, as reported project exit margins are higher than opening margins.
Accordingly, project completions during periods of increased construction activity deliver higher reported profit results. This is what occurred in FY24 when a higher than usual percentage of projects were closed out in FY24 which supported exit margin expansion.
Shape’s construction revenue recognition policy is based on the percentage of completion method. This revenue recognition method measures revenue as services are provided to the customer, based on costs incurred for work performed as a percentage of total estimated costs under the construction contract.
For example, assuming a $10 million construction contract where costs incurred for work performed is estimated at $5 million, that is (say) 50 percent complete at 30 June, with a gross margin of 9 percent, the gross margin earned would be reported as 9 percent of $5 million, or $450,000.
Based on the broadly accepted accounting doctrine of conservatism, and in keeping with sound governance principles, Shape’s management appear to conservatively apply their judgment of the percentage of project completion. This means that on actual completion of the project, 100 percent of the project revenue and gross margin is recognised. This may result in any previously conservatively stated work-in-progress revenue and margin estimates being taken up in the reported profit results on project completion. This conservative revenue and margin judgement while projects are under construction minimises the potential for any impairment or negative profit adjustments being reported. It also ensures that profit guidance and analysts’ earnings estimates are consistently met. Over time, the market has a habit of rewarding companies that consistently deliver on their earnings guidance estimates by applying higher price-earnings multiple than would otherwise apply.
Shape’s conservatively stated margins on projects under construction together with record backlog orders of $480 million, up 5 percent since 30 June 2024 (FY24: $457 million) imply a strong FY25 reported profit result.
Moderation in costs and labour challenges
Significantly, Shape management have noted in their AGM commentary a moderation in costs and labour challenges heading into the close of the December half-year. This is reflected in the 11.5 percent increase in the total workforce to 636 employees in FY24. The Group engages with an extensive network of 2030 contractors.
Another useful performance measure is the Group’s strong Client Net Promoter Score which emphasises client’s appreciation for the value provided and which is running at 88. Importantly a high Net Promoter Score aligns with an elevated level of repeat business which is currently sitting at around 84 percent. In FY24, 90 percent of projects delivered were completed on time with zero defects. These outcomes create deep customer loyalty and speak to the quality of Shape’s work which is foundational to its continuing success.
Management’s AGM commentary confirmed that the business is tracking largely in line with expectations and given the backlog order book of $480 million, shareholders can justifiably anticipate a strong full-year 2025 profit result.
