EFRAME’s earnings growth for the next 3 years is expected to be substantial, driven by resilient demand for comprehensive door set solutions and the new contributions from cross-selling of new window set product offerings. This is attributed to the recovery of the domestic property sector post Covid 19 pandemic, particularly for delayed housing projects. We value EFRAME at RM1.08/share, based on 15x CY25 EPS. We believe the valuation is fair, considering the exponential growth expected from synergistic acquisitions and horizontal business expansion. Not Rated.

About Econframe Bhd

Econframe Bhd (EFRAME) specialises in providing comprehensive door set solutions, which include the design and manufacturing of metal door frames, the production of fire-rated door sets, and the trading of wooden doors and ironmongery. With a dominant presence in the market, EFRAME commands approximately 60% of the market share of the production of metal door frames in Malaysia. Its extensive client portfolio comprises over 700 well-known domestic property developers and contractors, solidifying its position as a trusted partner in the industry.

Synergistic Acquisition of Window Business

EFRAME attributes its impressive 23.3% CAGR in revenue over the past three years (from FY20 to FY23) to its highly customisable door manufacturing, tailored to meet the demands of large-scale housing construction projects undertaken by domestic property developers such as MAHSING, IOIPG, IJM, ECOWLD, and others. The recent acquisition of a 65% stake in Lee & Yong Aluminium Sdn Bhd (LYASB), based in East Coast Malaysia, in September 2023, has further positioned EFRAME for synergistic growth. LYASB is principally involved in the fabrication and installation of façade aluminium glazing and glass products. This strategic move enables EFRAME to provide comprehensive solutions encompassing both doors and windows for future project orders.

The acquisition comes with a minimum profit guarantee of RM4.0mn per year (effective profit guarantee: RM2.6mn) for FY24-FY26. Considering LYASB's reported net profit of only RM1.0mn to RM2.4mn between FY19 and FY21, this profit guarantee indicates a significant jump in earnings potential, nearly doubling previous figures. We believe that the surge in Klang Valley-focused projects and the rise of the domestic property sector, along with higher average selling prices for window products, are expected to buoy the new business entity’s effective earnings contribution to approximately RM6mn/RM7mn/RM10mn for FY24/25/26F, respectively. This will be supported by capacity expansion as a result of growing labour size and facility expansion. Notably, EFRAME plans to acquire another piece of land adjacent to LYASB’s existing facility, which is estimated to bolster the capacity by an additional c.40% to fulfil the growing order book.

Growing Orderbook

In addition to the aforementioned inorganic growth opportunities, the recovery of the property industry following the Covid-19 pandemic could further strengthen EFRAME's order book, leveraging its dominant market position as the largest door set manufacturer in the Klang Valley. Currently, EFRAME’s door set manufacturing order book stands at approximately RM80mn, supported by a production capacity of 55,000 units per month, operating at c.70% utilisation rate. Furthermore, the acquisition of LYASB positions EFRAME to expand its presence into East Coast projects, facilitating further cross-selling opportunities to both new and existing clients. Consequently, we gather that the order book of the new business has surged to c.RM40mn post-acquisition for FY24 (up from an average of RM30mn previously) and is operating at a c.70% utilisation rate.

Effective Raw Material Procurement Management Leads to Stable Margins

As a manufacturer specialising in metal door sets, steel coil stands out as the primary raw material for EFRAME, constituting approximately 71% of its input costs. Despite fluctuations in commodity prices due to global demand and supply shocks, EFRAME has maintained a robust gross margin, averaging around 33% from FY19 to FY23. We attribute this achievement to its effective procurement strategies, facilitated by a short lead time of approximately 30 days between procurement and manufacturing stages.

Moreover, EFRAME adopts a proactive approach to mitigate the impact of price volatility. By shortening the quotation validity period to around 5 days, the company can swiftly adjust prices in response to market fluctuations. During periods of decreasing prices, EFRAME strategically increases its steel inventory to lower the average inventory carrying cost, thereby enhancing cost management efficiency.

Additionally, EFRAME leverages its net cash position to enhance cost control, thereby reducing dependence on credit terms for procurement. This proactive financial management approach enables the company to reduce its reliance on external financing.

Business Expansion Horizontally Into Construction Sector

In addition to its existing role as a building material manufacturer and service provider, EFRAME is expanding its footprint in the construction sector, focusing on industrial properties. In mid-January 2024, EFRAME proposed to acquire a 70% stake in ETA World Sdn Bhd (ETA) for RM56mn. ETA specialises in building factories and industrial properties. This deal will be financed through a combination of: (i) internally generated funds of RM18.1mn, (ii) borrowings of RM10.0mn, and (iii) issuance of consideration shares of RM27.9mn. The acquisition is slated for completion by 1HCY24 and is accompanied by an effective profit guarantee of no less than RM7mn per year for 3 years. We believe that this is a favourable deal, as it values the business at 8x PER FY24F’s effective guaranteed profit, which is lower than the 13x average 1-year forward PER of small-cap construction players in our coverage universe.

We understand that the construction order book of ETA stands at RM200mn currently, which will provide earnings visibility for the next two years. Additionally, we estimate the group achieving an order book replenishment target of RM200mn per annum, driven by the increasing demand for factories and warehouses backed by China+1 policy amidst the geopolitical tensions. Based on the guided net margin of 12%, which is supported by its historical average net margin of 15% for FY20- FY22, ETA is projected to contribute an effective net earnings of approximately RM9mn/RM12mn for FY25/26F.

Looking ahead, EFRAME's earnings stand to receive a significant boost from this new revenue stream generated by ETA, capitalising on the increasing demand for factory and warehouse facilities in Malaysia. With plans to actively bid for industrial land to undertake additional turnkey projects, this strategic move is expected to further enhance EFRAME's earnings trajectory in the coming years.

Sound Financial Position

As of the end-February 2023, EFRAME reported solid financials with RM26.7mn in cash and cash equivalents and RM8.2mn in total borrowings, resulting in a net cash position. However, the anticipated acquisition of ETA by 1HCY24 is expected to shift the group’s position to a net gearing ratio of 0.1x. Nonetheless, we maintain optimism about EFRAME’s financial health, considering its strong business outlook and effective capital management.

Forecast

From FY20 to FY23, EFRAME charted a significant revenue CAGR of 23.3% to RM75.9mn. This was largely contributed by surging demand for the door set solution from domestic property developers. In addition, EFRAME posted a stronger 1HFY24 revenue and core earnings growth of 53.5% and 55.1% YoY to RM54.2mn and RM8.5mn, respectively, after the completion of LYASB’s acquisition in September 2023. We expect 2HFY24 results to be substantially stronger, driven by higher earnings contribution from LYASB.

Going forward, we forecast EFRAME’s revenue and core earnings to grow at a 3- year CAGR of 39.4% and 40.8% to RM205.4mn and RM36.6mn in FY26F, respectively. The growth is primarily fuelled by synergistic value delivered from cross-selling of door sets and window solutions, along with on-going horizontal integration efforts across the business.

Valuation

Currently, there is no listed company on Bursa Malaysia that is directly comparable with EFRAME. Nevertheless, we reference SYNERGY, SIGN and TOPMIX, which are furniture players that mainly focus on the design, development and sale of ready-to-assemble furniture, for comparison. We assign a target PER of 15x to EFRAME and arrive at a fair value of RM1.08/share, against EFRAME’s CY25 EPS of RM0.07/share. This valuation is premised on a 10% discount to the peers’ 1-year average PE of 16x, reflecting EFRAME’s lower-than-average ROE and absence of a dividend policy. That said, we believe our valuation is justified by the group’s robust EPS growth over the next 3 years and its strategic horizontal business expansion, which is expected to deliver synergistic value. Not Rated.

Source: TA Research - 24 Apr 2024