This article first appeared in The Edge Financial Daily on July 11, 2019
EITA Resources Bhd
(July 10, RM1.48)
Maintain add with an unchanged target price (TP) of RM2: We recently met up with EITA Resources Bhd management for an update on the group’s operations. Lift manufacturing work on the mass rapid transit 2 (MRT2) infrastructure jobs should start in the second half of calendar year 2019 (2HCY19), while the company started recognising higher profits from its installation of substation jobs from the second quarter (2Q) of CY19.
In 2017 and 2018, EITA won the lift infrastructure jobs for the MRT2 (RM69.8 million) and light rail transit 3 (LRT3) (RM206.8 million) projects, totalling RM276.6 million. While negotiations are still ongoing with the main contractors on the pricing for the lift infrastructure jobs, EITA said it expects the total lift infrastructure job value to be eventually reduced by half due to changes in project design and reduction in the number of stations for both the MRT2 and LRT3 projects.
We had earlier assumed that the MRT2 and LRT3 job values might be cut by 25%. However, if we now assume a 50% cut in the total cost for the MRT2 and LRT3 lift jobs, EITA’s financial year 2020 to 2021 forecast (FY20-21F) earnings per share (EPS) would only fall by 1.5-1.7% as the LRT3 project is only expected to be completed by 2024F and work on the LRT3 lift jobs will only start in FY22F. The MRT2 jobs should start in 2HCY19 and be completed in 2022F. The total outstanding order book for EITA’s lift manufacturing jobs stood at RM343 million as at end-March 2019.
We expect EITA’s group earnings in FY20F to be boosted by its 60%-owned unit TransSystem Continental Sdn Bhd which is involved in the installation of substations. Outstanding substation order book stood at RM317 million as at end-March 2019, with projects to be completed over the next 18-24 months. Its main customers are Tenaga Nasional Bhd (“add”) and Sarawak Energy (not listed). The power division recorded a RM900,000 pre-tax loss on a modest revenue of RM12.1 million in 1HFY19 in the initial stages of work done on the substations. We expect better numbers from the power division starting 2HFY19. We estimate that the division’s profit before tax (PBT) margin to be about 10% for this division.
Until negotiations on the pricing for the MRT2 and LRT3 lift jobs are concluded, we maintain our forecasts and TP, based on an unchanged 20% discount to the construction sector’s 15 times price-earnings (PE) target (12 times PE) — the discount is to reflect its small market capitalisation. We maintain our “add” rating as the stock is trading at an attractive FY20F seven times, supported by a dividend yield of 4.9%. Rerating catalysts are more manufacturing and substation job wins. Downside risk is failure to win more manufacturing jobs. — CGSCIMB Research, July 9