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07-11-2007 (source: The Edge Daily)
Melati Ehsan boosted by RM1.7b jobs

Melati Ehsan OSK Investment Research said Melati Ehsan Holdings Bhd is on the verge of displaying strong growth moving forward from its current order book of RM1.7 billion, with 85% of it still outstanding.

Melati, being the only Main Board construction stock listed in March since the last three years, is mainly involved in turnkey construction with a specialisation in construction management. It is also involved in property development and trading.

The research house has estimated that Melati's unbilled amount should be able to keep the company busy for the next three years as that is the average project lifespan outstanding, and indicated that its outstanding order book is 8.4 times and 4.6 times FY07 and FY08 revenue respectively.

"We believe Melati is capable of replenishing its order book by some RM400 million annually. In our view, this should be sufficient to maintain its outstanding order book amount, given our FY08 and FY09 annual burn rate of between RM300 million and RM420 million," it said.

It said the company managed to grow its order book at a 38.5% compound annual growth rate (CAGR) between FY04 and FY07, and that its management had indicated that its historical success rate had always stayed above the 30% mark for its RM1.7 billion tendered projects.

It said the soon-to-be launched flood mitigation scheme is of particular interest from the over 80% tendered jobs under the Ninth Malaysian Plan (9MP) worth RM1.7 billion, as the company is currently involved in a flood mitigation project up north.

"We like Melati's ability to identify certain inherent problems in existing structures and subsequently, proposing solutions to its potential clients. In essence, Melati creates projects for itself rather than wait for available jobs. Jobs attained and completed thus far via this method sum up to some RM300 million," it said.

The research house said the company is venturing into property development as it had recently acquired 99.3 acres of land in Pandamaran, Klang for RM32 million.

It said the mixed development is estimated to have a gross development value (GDV) of RM500 million and should begin construction soon with a target completion by end-2012.

It has initiated a Buy call on Melati with a 50% upside, as the company is currently trading at six times and 4.6 times FY08 and FY09 earnings, or a steep discount to the average 10 times-to-13 times multiples of small cap construction players.

"Our forecasts show a 22% and 30% y-o-y (year-on-year) growth in Melati's earnings for FY08 and FY09. By tagging FY08 earnings to nine times multiple, we derive a target price of RM2.48," it said.

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