Thursday 29 Feb 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on September 19 - 25, 2016.


EVERSENDAI Corp Bhd learnt a harsh lesson from its diversification into oil and gas. Nevertheless, having booked a one-off RM110 million impairment on its investment in Singapore-listed Technics Oil & Gas Ltd, executive chairman and group managing director Tan Sri A K Nathan can now breathe a sigh of relief and say the worst is over for Eversendai.

The company posted a maiden net loss of RM71.7 million for the six months ended June 30 compared with a net profit of RM33.4 million in the previous corresponding period.

To regain investor confidence, Eversendai will have to deliver earnings in the coming quarters. Fortunately, the company has secured new contracts worth RM1.53 billion this year, bumping up its total order book to a respectable RM2.4 billion.

“We will return to the black in the coming quarters,” Nathan tells The Edge. “Our investment in Technics has been a painful lesson for us but it is fully written off. There is no more exposure to that investment going forward.”

That said, will earnings alone be enough for investors to take a second look at the stock, which has fallen 67.4% (taking into account dividends) since Eversendai was listed in July 2011?

On paper, Eversendai is trading at a deep discount to its earnings potential. Its order book of RM2.4 billion is substantially higher than its market capitalisation of RM348.3 million.

Assuming a conservative net margin of only 7.5% on an order-burn rate of RM1 billion a year, the group would have an annual net profit of RM75 million. This simplistic and conservative estimate values the company at a low 4.64 times earnings.

In fact, the average target price for Eversendai is 65 sen based on five analysts’ forecasts.

“Subsequent to the earnings revisions, we raise our target price from 50 sen to 66 sen based on unchanged [price-earnings ratio] of six times CY2017 earnings per share. Maintain BUY on Eversendai,” writes TA Securities in a recent report.

However, Eversendai’s low liquidity and volatile earnings track record make it unappealing to institutional investors.

“Funds are highly reluctant to invest in Eversendai. Since it was listed, it has grossly fallen short of expectations. Lots of promises were made but earnings haven’t been delivered. Sure, its order book grows every year but we need to see results. The earnings need to be delivered,” explains a fund manager.

The stock’s illiquidity does not help either. Nathan owns 71.8% of the shares and daily trading volume has averaged only 634,562 in the past year, which works out to 0.57% of the free float or 0.08% of the total share capital — hardly enough for institutional funds.

The bigger funds invested in the stock have not been able to unwind their loss-making positions. The Employees Provident Fund still has a 5.68% stake in the company while Lembaga Tabung Haji holds 5.21%. The position of these institutional funds in Eversendai has remained virtually unchanged since its initial public offering.

“Even if earnings pick up, there are many investment funds trapped in the stock simply looking for an exit. There isn’t enough liquidity. Unless that changes, it is not worth the risk for a fund to buy in,” explains the fund manager.

But the unwillingness or inability of funds to buy into Eversendai does not mean the company does not have fundamental value.

While many companies are facing difficulty replenishing their order books, it is not a challenge for Eversendai to secure jobs. In fact, its order book is quite diversified compared with those of its peers, which are focused on Malaysian projects. Of Eversendai’s RM2.4 billion order book, 59% of the contracts are from the Middle East, 28% from Southeast Asia and nearly 13% from India.

Nathan also points out that the company’s exposure to oil and gas is relatively small — only 13.6% of the order book. Of the balance, 74.7% is for structural steel work, 7% for construction and 4.7% for power plants.

In terms of earnings visibility, the order book is expected to last until 2018. Beyond that, Nathan points to Eversendai’s track record in replenishing its order book since its listing.

“We are working very hard to secure new jobs. Since our listing, I have been aiming for an order book of RM2 billion [a year]. If things go well, we may achieve it this year. At least, we will do better than last year,” he says.

Eversendai is bidding for over RM20 billion worth of jobs, of which RM11 billion is for structural steel work and the remaining for oil and gas projects. Most of the oil and gas projects that the company is bidding for are in the Middle East, notes Nathan.

TA Securities projects a net profit of RM84.8 million for FY2017 on forecast revenue of RM1.748 billion based on a net profit margin of only 4.9%.

Against this backdrop, however, the company’s share price remains stubborn, hovering at around 45 sen. At this rate, some argue, it might even make more sense for Nathan to take the company private.

At the current share price, it would cost him only RM98.4 million since he controls 71.8% of the equity.

Eversendai has RM124.79 million cash on its books less overdrafts and deposits with financial institutions.

Though Nathan is in a position to buy back Eversendai for cheap almost five years since listing it, he says he has no plans to do so.

“It would make sense for me but what does that mean for the other shareholders? Some have stuck it out since the IPO. I would prefer to undertake a corporate exercise to unlock the value of the company,” he says, acknowledging that poor liquidity is a key concern for investors.

He points out that Eversendai has not tapped the capital market for additional funds since it was listed.

Corporate exercises that could help improve the counter’s liquidity include a share split, bonus issue or the issuance of warrants. That said, Nathan stresses that he will only look at such exercises when the earnings come in and the stock’s valuation improves. 

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