Ekovest Bhd
(Sept 23, RM1.92)
Initiate buy call with a target price of RM3.00: Ekovest Bhd is a deeply undervalued contractor and concessionaire. It recently announced that it has entered into a binding term sheet that would see it dispose of a 40% equity stake in Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd, the holding company of the Duta-Ulu Klang Expressway (DUKE) 1 and 2, to the Employees Provident Fund for RM1.13 billion. This sum implicitly values the expressways at RM2.82 billion versus Ekovest’s market cap of RM1.69 billion. While the group has made no official commitment, we do not discount the possibility that part of the cash proceeds would be declared as special dividends in the near term.

Ekovest’s longer-term outlook was given a boost with the recent announcement that it has been granted a 53.5-year concession to build, operate and transfer the new 50km Setiawangsa-Pantai Expressway (SPE), formerly known as DUKE Phase 3, that links the Middle Ring Road 2 at Taman Melati to Kerinchi Link at the Federal Highway.

Alongside the benefit of obtaining a concession, the new expressway would enhance the medium-term order-book visibility, as the group would snap up much of the construction jobs worth over RM3.7 billion. We expect the construction jobs to contribute RM139 million to RM212 million per annum to Ekovest’s financials for the next three years.

Ekovest’s RM4.5 billion external outstanding order book represents a superior order book cover of 5.6 times, significantly above that of other construction companies under our coverage (1.7 times to 3.8 times). About 84% of the outstanding order book is from the SPE. We gather that the group is aiming to secure another RM1 billion worth of infrastructure-related construction jobs in its financial year ending June 30, 2017. — UOB Kay Hian, Sept 23