INVESTMENT MERIT

- Highways to further catalyse Ekovest’s growth. After completing the acquisition of the DUKE highway, Ekovest is set to extend the highway for another 6 – 8km to Jalan Tun Razak and Sri Damansara (DUKE 2). Ekovest has already issued RM2.3b bonds to refinance the existing DUKE highway’s debt and financing for DUKE 2’s capex of RM1.2b.. Other than that, DUKE 2 also will boost Ekovest’s total orderbook to about RM1.4b (external: RM590m) from RM230m currently. Lastly, DUKE 2 will improve the highway’s traffic flow and hence giving higher recurring income for the Group in the foreseeable future.

- Diversifying into property development. Recently, construction group Ekovest pre-launched its maiden property project in Klang Valley, known as EkoCheras. The pre-launch was well-received by the market with almost all units of the service apartment block taken up. We gather that the total GDV for the entire EkoCheras project stands at RM1.6b and lasting until 2017. Location wise, Ekocheras is strategically situated adjacent to the proposed MRT Line 1. This will be the “first of many” for Ekovest to venture into property development where it has about another 20 acres of undeveloped landbank in the Klang Valley, with further launches expected next year. Notably many of their projects are near the DUKE and DUKE 2 highway, which is handy in light of the recent measures as projects with strong connectivity will fare better in terms of take-up rates. Ekovest also has about 25 acres of land in Danga Bay, Johor.

- A diversified earnings base. While construction remains its bread and butter business, we like Ekovest for its efforts to diversify into property and infrastructure. We gather that the average daily traffic (ADT) for the existing DUKE highway has already met the consultants’ target and should contribute some profit starting next year. Also, the recently-launched EkoCheras project will start contributing to the Group’s bottomline next year. By then, Ekovest will be a triple-play with earnings stream from: (i) construction, (ii) property development, and (iii) highway operations.

- Trading BUY. Ekovest is currently trading at 11x PER on FY14 earnings. Ekovest appears expensive vis-à-vis its small-mid cap construction peers whicha are trading at an average of 8-9x. However, it is no longer a pure construction company anymore. Hence, if we were to value the stock based on SOP, Ekovest could be valued in a range of RM2.86 - RM3.22 (50% - 35% discount to RNAV for its property). In our SOP, (i) we value its DUKE 1 and 2 at RM460m, derived from DCF-based (WACC: 7.2%), - also in line with latest independent valuation of the highway (ii) applying 8x to its FY14 construction earnings, and (iii) RNAV of RM363m – RM472m with applied discount of 50% - 35%. Higher discount rate of 50% takes into account the recent property sector tightening measures announced by the government during Budget 2014. TRADING BUY.

TECHNICALS

- Resistance: RM2.77 (R1), RM2.95 (R2)

- Support: RM2.70 (S1), RM2.53 (S2)

- Comments: There is very little “technical” impetus for the stock to head higher in the near term, although we expect EKOVEST to find strong support between the RM2.70-RM2.75 range. Wait for the share price to stabilise at the aforementioned support levels before buying in.

BUSINESS OVERVIEW

Established in January 1985, Ekovest is one of the contractors in Malaysia. It is involved in a wide range of business activities related mainly to civil engineering and building construction. Ekovest was involved in several large prestigious projects which include University Malaysia Sabah, Kuala Lumpur Sentral station, KLCC Fit-Out Package, Labuan Financial Park, KLIA, The Federal Administration Capital of Putrajaya, Universiti Tun Hussein Onn Malaysia and DUKE Highway. Ekovest recently started diversifying into infrastructure (through 70%-owned DUKE highway) and property development.

BUSINESS SEGMENTS

- Construction. The construction segment is the major contributor to Ekovest’s earnings, accounting for 95% of total revenue in FY13.

- Property development. No contribution yet since the division is still at its early stages having just launched its maiden property project.

- Infrastructure. Ekovest currently owns 70% of Duta-Ulu Kelang Expressway (DUKE) Highway. It is a 54-year concession ending 2059.\

Source: Kenanga