Mitrajaya Holdings Bhd
(Nov 5, RM1.01)
Initiate buy with target price (TP) of RM1.52: Mitrajaya has successfully grown its job wins from less than RM100 million per annum during financial year 2008 to 2010 (FY08 to FY10) to over RM500 million currently. New job wins year-to-date (YTD) are at a record RM547 million, surpassing last year’s high of RM501 million.

Mitrajaya’s order book of RM1.3 billion implies a strong cover of 6 times FY13 construction revenue, vis-à-vis the sector average of 2.1 times. Its order book profile is also relatively “young” with 75% comprising jobs that were secured less than a year ago, mitigating cost overrun risks.

Backed with RM2 billion in outstanding tenders, Mitrajaya aims to hit an order book target of RM1.5 billion by year-end, implying that another RM200 million worth of jobs are forthcoming.

These tenders are mainly building works for developers, both private and government related.

Budget 2015 announced the implementation of the light rail train (LRT) Line 3 (RM9 billion). We view Mitrajaya as a potential beneficiary via station works (RM720 million to RM960 million) given its experience with the ongoing LRT extensions.

Mitrajaya will soon be launching the Wangsa 9 condominiums (gross development value [GDV]: RM650 million) in Wangsa Maju. We expect encouraging take-up rates given its strategic location (opposite Wangsa Walk Mall) and LRT connectivity (Sri Rampai LRT station 150m away).

Other divisions. These include (i) its South Africa investment which is a low risk and debt free self-sustaining model of selling land and (ii) 51% stake in Optimax, Malaysia’s largest standalone eye specialist, which recently returned to the black.

Risks include execution risk, rising material prices, project implementation delays, weak property market and political risks.

We expect FY14 core earnings to almost double to RM48 million (up 92% year-on-year [y-o-y]) and FY15 to see a record RM60 million (24% y-o-y).

Our forecast implies superior three-year earnings compound annual growth rate of 40%.

Mitrajaya is an under researched hidden gem, which offers superior earnings growth at cheap valuations of 8 times and 6.5 times FY14 to FY15 price-to-earnings ratio and decent yields of 3% to 5%.

Our TP is based on 10 times FY15 earnings, in line with our target valuation parameter used for small-cap contractors.

For an alternate valuation perspective, at current market capitalisation, investors buying Mitrajaya would be getting its land at a 48% discount to market value and all its core business of construction, property development and Optimax (not to mention a golf course in South Africa) for free! — Hong Leong Investment Bank, Nov 5

This article first appeared in The Edge Financial Daily, on November 6, 2014.