This article first appeared in The Edge Financial Daily on April 14, 2017

Eita Resources Bhd
(April 13, RM1.96)
Initiate with add with a target price (TP) of RM2.40: Eita Resources Bhd’s core business is the manufacture and installation of elevators, escalators and busduct systems.  In just 10 years, Eita has transformed from a manufacturer into the leading domestic player in the elevator market, with a 10% market share nationwide. This in an impressive achievement and an indication of the management’s strength and experience as this market is competitive, dominated by top international brands. In the elevator infra market, Eita is considered the No 1 player after it secured the mass rapid transit (MRT) job. 

The completion of the existing MRT installation elevator project by mid-2017 should boost Eita’s track record, putting them in a strong position to secure more elevator jobs like MRT 2 and light rail transit (LRT) 3, which is expected to be awarded over the next few quarters. We have not assumed any potential earnings from LRT 3 and MRT 2 jobs. 

We believe Eita’s elevator manufacturing business should also benefit from the constant flow of affordable condominium launches in the country over the next few years. Property consultant Jones Lang Wotton has projected cumulative completed medium-cost condominiums in the Klang Valley alone to rise from 300,000 units currently to 420,000 by 2020, a 120,000-unit or 40% increase. This is equivalent to a potential RM800 million elevator industry order book just in the Klang Valley alone. 

Financial year ended Sept 30, 2016 (FY16) was the best year so far for Eita, when it recorded RM24.8 million core net profit. As the MRT job is targeted to be completed by mid-2017, we project a weaker FY17F (forecast) core profit before an earnings recovery in FY18F, supported by expected higher exports and higher earnings from TransSystem Continental Sdn Bhd (which was acquired in January 2016). 

Eita’s return on equity (ROE) is the highest among our small- and mid-cap stock universe. ROE measures how well a company uses its resources to generate profits. 

We initiate coverage with an “add” call. Valuation is attractive at 2018F 8.4 times price-earnings ratio  (PER), 43% discount to 2018 14.4 times PER for the small-cap construction sector. As there are no listed companies in similar businesses, we value Eita at 2018 12 times PER, a 20% discount to the construction sector’s 15 times target PER — discount to reflect its small market cap and indirect exposure to the sector — deriving a RM2.40 TP. Potential rerating catalyst is securing the MRT 2 elevator job and strong export sales. Risks are failure to get the MRT 2 elevator job and weak export sales. — CIMB Research, April 12