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04-02-2008 (source: The Edge Daily)
Is Melati Ehsan undervalued?

Despite being one of the smaller players in the construction industry, turnkey construction company Melati Ehsan Holdings Bhd (MEHB) has appeared on the radar screen of some brokers. Just this month, the company saw the emergence of a new substantial shareholder - Lembaga Tabung Haji.

The government-owned pilgrim fund has been picking up shares in MEHB recently. As at end-2007, Tabung Haji held a 3.26% stake in MEHB. Today, it has about 7.34 million shares or a 6.12% stake in the company. So, what does the fund see in MEHB?

Having listed last March, the construction company's stock price is trading at RM1.50, a 17% premium to its issue price of RM1.28 per share. MEHB's price-earnings ratio (PER), on the other hand, stands at 6.1 times. This is relatively low compared to an average PER for small cap construction players of 10 to 13 times.

"MEHB is trading at a low PER. This could be why Tabung Haji jumped in, to seize the opportunity to buy cheap," notes an industry observer. According to OSK Research analyst Jeremy Goh, the PER of 6.1 times for MEHB is "beyond justifiable". "MEHB is currently undervalued," says Goh, who covers the stock. The company's earnings per share for its financial year ended Aug 30, 2007, is 24.6 sen per share. Its order book has ballooned 41% to RM1.7 billion in less than a year. Out of the RM1.7 billion, Goh says RM1.4 million is currently unbilled.

"Its current order book can last the company comfortably for three years. Earnings are very visible for the next three years," points out Goh.

Can it keep up this momentum? Analysts reckon it can. "We believe MEHB 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 FY2008 and FY2009 annual burn rate of between RM300 and RM420 million. Between FY2004 and FY2007, the company managed to grow its orderbook at a 38.5% compound annual growth rate," says OSK Research in a November note.

"From our understanding, MEHB has tendered for projects with a total value exceeding RM1.7 billion. Management indicated to us that its historical success rate has always stayed above the 30% mark," adds the research house. The majority of MEHB's projects are from government bodies such as Jabatan Kerja Raya and Perbadanan Kemajuan Negeri Selangor. It is also conducting flood mitigation works in Kepala Batas, Penang. It is its involvement in the Kepala Batas flood mitigation project that Goh reckons will give MEHB leverage to get a slice of the flood mitigation project in Johor.

Additionally, according to OSK Research's report of Jan 29, MEHB submitted a proposal to participate in the earthworks, infrastructure and drainage of a property development project in Ijok, Selangor. In the midst of strengthening its construction portfolio, the construction company has ventured into property development. MEHB purchased seven parcels of land in Pandamaran Klang that total 99.3 acres last year for RM32 million. The company plans to mixed development projects there, which will have a gross development value (GDV) of RM500 million. Having purchased the land for a good price, good margins are expected from this new venture.

"The Klang project will have good margins. The cost of the land was only 6.5% of the cost of GDV," says Goh. No doubt, this small construction company is slowly building its strength. But a look at its recent 1Q ended Nov 30, 2007, showed its long-term loans increasing to RM21.57 million from RM19.26 million in August. Its trade payables, on the other hand, increased 7% in three months to RM58.1 million at end- November. According to OSK Research, a large portion of its RM19.26 million debt is essentially due to the way MEHB receives cash for government projects.

"Rather than receiving cash outright from the government when payments are due, the government requested that MEHB take a loan of the equivalent amount from Bank Pembangunan. After a certain time frame, the government would repay the bank for the equivalent sum along with interest charges. The loan is guaranteed by the government," says the research house in its November note. While its trade payables have increased, so have its trade receivables. In three months these grew 44% to RM93.77 million in November, from RM65.09 million as at end-August. According to MEHB's FY2007 annual report, 67.5% of the RM65.09 million trade receivables are from related parties.

Its FY2007 net profit jumped 103% to RM29.5 million from RM14.5 million in FY2004. Interestingly, its net profit for FY2007 surpassed its IPO forecast net profit for the year of RM25.4 million. Net assets jumped 105% to RM115.98 million in FY2007 from RM56.56 million in FY2006. Also, the construction company paid dividends of 7.5 sen per share for FY2007. This translates to a yield of 5%. MEHB may be less than a year old on the stock market but all signs say it has already caught the attention of investors.

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MEHB newspaper cutting
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