Recommending Trading Buy on EITA with Fair Value of RM1.48 (16% total upside) on FY17E PER of 9.5x.EITA has an established manufacturing name and presence in the elevator systems industry and is further supported by an in-house busduct system and fire-resistant cable to tap the robust construction sector. Current outstanding order book of RM107m provides near-term earnings visibility while MRT2 provides more contract flows over the longer term.

Transformation into a manufacturer. EITA started its business in 1996 to market and distribute bus-duct and cables, and was subsequently listed on Bursa Malaysia in 2012 at an IPO price of RM0.76. Over the years, the Group has developed its house brand namely EITA-Schneider (elevator system), Furutec (bus-duct system), Pyrotec (fire-resistant cables) and REFAS (Lighting Control System). Manufacturing contribution in 9M16 revenue exceeded 57% of total revenue (from 40% in FY10), marking the Group’s successful transformation into a relevant manufacturing player. Elevating success. EITA has delivered more than 2,500 elevator systems to projects ranging from residential, commercial, industry, institutional buildings to public amenities. Notably, the Group secured RM94m worth of contracts in MRT1 and its outstanding order book stood at RM107m (1.6x of FY15 segmental revenue) as of 9M16 which will provide near-term earnings visibility. Moving forward, we believe that the Group can secure more major contracts, particularly in MRT2 (offers total contracts of RM500m vs MRT1 of RM300m) in view of its proven track record and established in-house brand name.

In-house E&E products expanding margin. Besides elevator, the manufacturing division also offers growth potential in E&E products. We understand that the in-house bus-ducts system and fire-resistant cable products have gathered encouraging sales momentum with rising demand. Segmental gross margin expanded by 2.6ppt in 9M16 which was attributable to more favourable product mix and lower copper prices (YTD: -14%). Moving forward, we expect the margin uptrend to sustain in view of the strong distribution channel and rising demand of in-house E&E products on the back of higher safety and quality requirements of construction projects.

Strong core net profit growth. As the Group imports majority of its elevators equipment and parts from China for local assembly and installation, the Group has a hedging policy to lock in the rates as soon as a project is clinched, which has somewhat distorted its earnings growth. Stripping off the forex impact, 9M16 core net profit of RM19.0m surpassed FY15 core net profit of RM13.6m (140%) thanks to the MRT1-led impetus (c.RM52m recognised in 9M16 revenue). We are projecting core net profit of RM23.3m in FY16 and RM20.3m in FY17 as the growth moderates from high base post lumpy recognition from MRT1.

Trading Buy with Fair Value of RM1.48. Our FV is derived after ascribing 9.5x PER to its FY17E EPS of 15.6 sen. The valuation is at the lower range of our targeted PE range for small-mid cap construction players of 9.0-13.0x in view of its smaller market capitalization and single-digit net profit margin. We like EITA for its established in-house brand in elevators, bus-duct system and cables, which will allow the company to tap into the robust construction sector. In view of its successful transformation into manufacturing, we think that its valuation (8.5x PER FY17E) is modest and thus provides opportunity for investors seeking exposure in the construction sector.

Source: Kenanga Research - 29 Sep 2016