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This article first appeared in The Edge Malaysia Weekly on April 24, 2017 - April 30, 2017

SHARES of homegrown lift and bus duct manufacturer Eita Resources Bhd are having a good run, rising to a 52-week high of RM2.08 on April 13, on expectation of Mass Rapid Transit 2 (MRT2) job wins.

“As we have jobs under MRT1, it paves the way for more jobs under MRT2. If we get them, it will have a big impact on a small company like ours,” says the group’s managing director and co-founder Fu Wing Hoong.

The group is also expecting a receivable soon, as it has completed 90% of MRT1’s lift jobs. It was awarded RM94 million worth of contracts under MRT1.

“Although the market sentiment is not as bullish as before, we are confident that we can win more jobs as some competitors are reluctant to take jobs because of the banks’ stringent lending conditions,” Fu tells The Edge in an interview.

Eita Resources’ share price started rising soon after CIMB Research initiated coverage on the counter on April 12.

It is worth noting that the group reported a doubling of its net earnings to RM10.43 million for the quarter ended Dec 31, 2016 (1QFY2017) compared with RM4.24 million the previous year.

Interestingly, the group’s shareholders and directors, including Fu, have been selling shares in the company since late March. Up to April 19, six million shares, or about 4.6% equity interest, were sold. The shares were mostly traded at RM1.70.

Fu says, the shares were placed out to local institutional funds. “We believe this will be value-adding to our company and enhance our shareholder value. It will be easier if we want to raise funds in the future as well.”

The group, which had been in a net cash position since listing in 2012, fell into a net debt position in FY2016 ended Sept 30 as it needed funds to carry out the lift jobs for MRT1.

As at end-1QFY2017, the group had total borrowings of RM41.1 million and deposits, cash and cash equivalents of RM35.1 million.

The group’s order book, as at December 2016, stood at RM141.59 million, with RM102.45 million attributable to lift jobs. These jobs normally provide a 1½-year earnings visibility to the group, according to Fu.

The focus on affordable homes could also be a potential catalyst for Eita Resources. Fu says the group is eyeing more jobs from property developers, including those from China.

Fu believes that, technically, the full-year results for this year will be better than FY2016’s, as he expects the positive effect of its hedging policy to continue this year.

Eita Resources’ net profit in FY2016 fell 20.08% year on year to RM15.64 million, des–pite revenue rising 34.01% y-o-y to RM288.03 million. The drop in net profit was due to the unrealised foreign exchange loss on fair value valuation of the forward exchange contracts in FY2016, compared to a gain recorded in the preceding year.

Fu explains that the group is still a net importer of raw materials, even though 20% of its revenue is from its export markets, which are denominated in US and Singapore dollars.

According to him, the group’s earnings in the past few years have fluctuated in tandem with the movement of the renminbi as most of its raw materials are imported from China.

Moving forward, Eita Resources is also looking for mergers and acquisitions targets and more export markets to support the group’s future earnings. Fu says the group’s preference would be electrical and electronic assets in Southeast Asia.

“M&A has always been our growth strategy, we have always been in talks with other companies. However, nothing is concrete at this moment,” he says.

The group also aims to grow its export share to 50% in 2020 from 20% currently, by strengthening its position in its existing export markets in the Middle East and Southeast Asia.

“Our main focus now is Indonesia. We are still exploring Cambodia and we have recently secured some lift jobs there. As for Vietnam and the Philippines, we are expecting more activities,” Fu says.

Although it is not easy for a homegrown brand to penetrate new export markets, he says it is necessary to expand abroad to cushion the limited growth in Malaysia, which has a smaller population.

The group will also allocate funds to build a new lift factory with a test tower in Bukit Raja, Klang, which is expected to begin operations next year. “We will finance it with the listing proceeds from 2012 and some bank borrowings. It may eat into our profit for a short while, but the test tower will enhance our brand’s image,” Fu says.

Meanwhile, if the group succeeds in getting the lift jobs for MRT2, it may need to raise funds to grow the business. As the group’s net gearing ratio stood at only 0.03 times as at Dec 31 last year, it has the capacity to raise more funds. Fu says he is comfortable as long as the gearing ratio is less than 1.

Ruby Technique Sdn Bhd, owned by agribusiness group QL Resources Bhd, is the major shareholder in Eita Resources with 22.98%, followed by Fu, who had a 19.61% stake as at April 20.

 

 

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