Enra Group needs to look for new land parcels with fast turnaround times

This article first appeared in The Edge Financial Daily, on April 3, 2018.
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Enra Group Bhd
(April 2, RM2.60)
Maintain hold with a fair value of RM2.45:
Enra Engineering & Fabrication Sdn Bhd (EEF), a wholly-owned subsidiary of Enra, has served a payment claim under Section 5 of the Construction Industry Payment and Adjudication Act 2012 against its client, Gemula Sdn Bhd (Gemula), for RM10.2 million.

The claim represents the outstanding amount for work done (including variation orders) under two contracts with regard to a garage project of the 10th Mile Camp in Kuantan, Pahang, awarded by Gemula to EEF in 2016 — one for steel structure works while the other for the supply of building materials.

Enra said that it pursued the action to “best protect its interest” and it is of the opinion that “no provision for impairment loss is needed at this juncture”.

We believe the amount may be currently captured under Enra’s “trade and other receivables”. It could make up about 22% of Enra’s total trade and other receivables of RM46.6 million as at the end of December 2017.

While we are unable to predict the outcome of the adjudication, in the worst case, a full impairment could result in a loss of 7.6 sen per share, equivalent to 70% of our earning per share (EPS) forecast of 10.9 sen per share in FY18F. It could also erode Enra’s net tangible assets (NTA) by 7% from RM1.14 as at end-December 2017 to RM1.06. We are mildly concerned over the latest development.

Otherwise, the prospects for Enra’s oil & gas division are bright, underpinned by organic growth at its existing businesses, as well as new ventures such as the single-point mooring contract it recently won in Myanmar.

However, Enra still has much to do to improve the sustainability of its property earnings. Enra needs to look for new land parcels with fast turnaround times to fill the vacuum left by its completed Shamelin Star high-rise residential project in Malaysia, as well as its completing development in London. Its proposed land reclamation project in Labuan is unlikely to contribute significantly to the bottomline over the short to medium term. — AmInvestment Bank Research, April 2