· Share prices has fallen 17%, since our last TRADING BUY recommendation on 31- Oct-13 (TP range from RM1.17-1.31), titled “A Triple Play?” before peaking at RM1.40 on 30-Jul-14. YTD, its share price has eroded by 13%, 4% more than KL Construction Index’s 9% decline. We believe the stock price has lost momentum due to: (i) lack of fresh orderbook replenishment for FY15, (ii) consolidated losses arising from acquiring the remaining 30% stake in DUKE, and (iii) lowering of dividend payout given to shareholders.

· Acquired 100% equity interest in DUKE highway. EKOVEST has completed its rights issue exercise in Jun-14 and used the proceeds to acquire the remaining 30% equity interest in DUKE from MRCB. This resulted in a plunge in FY14 net profit due to losses of RM33.9m from the non-controlling interest unit. The current DUKE highway carries an average daily traffic of 130.0k vehicles. This exercise should yield positive result as EKOVEST will have full control over its operations and management.

· Orderbook at RM2.0b. The total orderbook of RM2.0b is mostly for DUKE Phase 2 and Phase 1 of River of Life project in Kuala Lumpur. The RM1.18b worth of DUKE Phase 2, which was secured on Jan-14, is currently 45% completed. While guidance of remaining orderbook is not available, we estimate that the group has some 40%-50% remaining out of its total orderbook, which offers 1.5 years visibility. The DUKE Phase 2 project, which is expected to be completed and opened by 4Q16, is expected to provide earnings visibility from FY17 onwards.

· Secured Approval-in-Principle for DUKE Phase 3. The c.35km length of DUKE Phase 3 will cover areas such as University Tunku Abdul Rahman, Wangsa Maju, Setiawangsa, Ampang, the Tun Razak Exchange and Bandar Malaysia development corridor and Kerinchi. On 10-Aug-15, the digital Edge Weekly reported that EKOVEST is in talks with 1Malaysia Development Bhd (1MDB) on the realignment of highway, whereby a 2km section will run along the border of Bandar Malaysia in Sungai Besi. Conceptually, this should provide better accessibility and higher traffic growth from Bandar Malaysia.

· However, significant earnings contribution before FY17 is unlikely. The financing method of this c.RM3.57b project is still unknown while details of project commencement remain vague. We reckon it is likely to be financed via issuance of Islamic medium-term notes by the SPV. This project duration is expected to be 3.5 years. We believe that DUKE Phase 3 should garner investors’ interest in the long run as it will catalyse the overall future EKOVEST’s earnings growth. However, at this juncture, we have not built this into our estimates as any significant earnings contributions before FY17 is unlikely.

· Property unbilled sales of RM588.0m. The major portion of the unbilled sales is from EkoCheras (GDV RM1.6b) and expected to last until 2017. Also, EKOVEST has launched Phase 1 of EkoTitiwangsa (GDV RM202.0m) in Jun-15 with some 40% takeup rate. In terms of upcoming launches, EKOVEST is looking to launch another 3 projects over the next 18 months, with a total GDV of RM2.4b (EkoGateway RM1.9b, EkoQuay RM210.0m, EkoPark Place RM320.0m). This should contribute to the Group’s earnings for next 2-3 years.

· Fairly valued. We introduced our FY15-16E earnings with higher revenue assumption from recognition of progressive unbilled property sales and DUKE Phase 2 project in FY16. It will take a while for the potential earnings accretion of the acquisition of the remaining 30% stake in DUKE to bear fruits as traffic growth numbers remains unexciting and thus, the rights issuance used to fund this acquisition will be a drag on the near-term EPS and ROE. Hence, our TP is revised downwards to RM0.80 (from RM1.17-1.31 previously), based on FY16E PER of 13.6x (-0.5SD @ 5-yr average), implying that the stock is fairly valued at this juncture. We may revisit the stock pending fresh updates on DUKE Phase 3 commencement date. Our TP which implies FY16E PER of 13.6x is already at the upper band of mid-cap contractors range of 10.0x-14.0x, implying that a lot of the announced positives have been priced-in and requires stronger earnings accretion to re-rate the stock further.

Source: Kenanga Research - 13 Aug 2015