This article first appeared in The Edge Financial Daily on April 20, 2017 - April 26, 2017

Eita Resources Bhd
(April 19, RM1.92)
Maintain add with an unchanged target price (TP) of RM2.40: We organised a meeting with Eita Resources Bhd’s management and 10 of our institutional clients on Tuesday. Eita was represented by its managing director Fu Wing Hoong, chief financial officer Kow Poh Gek and corporate affairs manager MK Tan. There were no surprises at the meeting.

Over the next few years, Eita will stay focused on growing its export markets, particularly in Asean. Exports formed 20% of the group’s revenue in financial year 2016. The domestic market outlook is stable with ongoing infrastructure jobs and launches of affordable apartments in major cities.

When Eita started its business 20 years ago, it was its intention to grow its in-house brands. Profits from its distribution and marketing business were reinvested in the company. Today, Eita’s in-house brands like Schneider, Furutec and Pyrotec contribute more than 60% of its group revenue.

Eita indicated tenders for the mass rapid transit Line 2 (MRT2) phase 1 elevator job should close by end-April, and we believe results of the tender should be out within the next two quarters. We understand MRT2 elevator jobs should be divided into a few packages. With the successful completion of Eita’s existing MRT job expected by end April, we think that the company stands a strong chance of getting at least one of the packages for the MRT2 job.

When asked about Eita’s strengths in the elevator market, management cited these three areas: i) maintenance and service, as its staff are in Malaysia and can respond to clients’ requests quickly; ii) design, as its manufacturing facilities are in the Klang Valley and Eita can meet its clients’ specific requests which are not so easy for its foreign competitors whose production operations are not in Malaysia; and iii) brand awareness, as Eita is a relatively young company but is gaining a strong reputation in the industry.

As at end-December, about 2,500 elevators nationwide were maintained by Eita. On average, 90% of elevators manufactured by Eita are still maintained by the company for a fee after the two-year warranty has expired. We estimate on average, Eita produces 250 elevators per annum. As such, about 225 units should be serviced by its maintenance division annually after the end of the warranty period, which is an additional RM1 million maintenance revenue annually. The gross profit margin from maintenance services is above 50%.

We maintain our earnings per share forecasts and TP based on 12 times 2018 price-earnings ratio (PER), a 20% discount to the construction sector’s 15 times target PER. The discount is to reflect its small market cap and indirect exposure to the sector. Our earnings forecasts exclude potential profits from MRT2 or light rail transit Line 3 jobs. Potential rerating catalysts are securing the MRT2 elevator job and strong export sales. Downside risks include failure to win the MRT2 elevator job. — CIMB Research, April 18