Melati Ehsan (1)

Finally Recovering From Hangover ?

Publish date: Wed, 7 May 2014, 10:22 PM 

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Melati is a construction company. It was listed shortly before 2008 election. 

One thing that caught my attention back then was that they have high profit margin. The company explained that they have a unique business model of bundling design with execution, which sets them apart from other construction firms. 

Post 2008 election (which saw a change in government in Selangor), Melati share price took a beating. Many other companies' share price also plunged as a result of the uncertainties, but they have since recovered and moved on. But Melati seemed to be stuck at low equilibrium for many years. Not only share price, its earnings are also very slow to recover.

However, recently, Melati share price had rebounced strongly, which prompted me to take a closer look. 

1. Background Info on the Company

Based on 120 mil shares and share price of RM1.28, market cap is RM154 mil.

The group reported RM17.7 mil net profit in past 4 quarters. Meaning historical PE multiple is 8.7 times.

Based on net assets of RM171 mil, loans of RM19 mil and cash of RM36 mil, the group is in net cash position.

2. Segmental Breakdown

When I studied Melati, the first thing I did was to flip to the back of the annual report to check out their land bank.

As mentioned in previous articles, one of my favorite investment theme is contractors which grew by venturing into property development. Melati must be one of them since they hold quite a lot of land bank.

Location			Description	Area	NBV	Year	price psf
				(acres)	(RM mil)		(RM)
Pandamaran, Klang			development land	98.2	34	2007	7.9
Pandamaran, Klang			development land	21.3	8.5	2009	9.2
Mukim Batu, KL			development land	1.2	22	2008	420.9
Mukim Petaling, Daerah KL			development land	2.5	5.0	2010	45.6
Total				123.2	69.5

As shown in the table above, the group has closed to 120 acres of land in Klang and 4 acres of land in Mukim of Batu and Petaling. 

The land was booked in at low Net Book Value of RM70 mil (RM8 psf for Klang land only).

The land bank they own are quite sizeable. I was expecting the group to derive a significant portion of its earnings from property development. But to my surprise, property development only contributed very little to earnings over the years. The bulk of the profit was still from construction activities.

FYE 31 August (RM mil)		2009	2010	2011	2012	2013	Nov 2013	Feb 2014
(Revenue)
Construction		163	140	77	136	131	30	45
Trading		20	4	1	12	28	9	11
Property development		-	-	8	6	67	28	23
(Operating profit)
Construction		10	7	3	9	11	6	7
Trading		0.4	-	1	0	1	0.3	0.3
Property development		-	-	4	2	5	1	(0.7)
Net profit		13	6	6	7	12	5	5

3. Share Price Movement

The company's share price rose by closed to 30% recently pursuant to relatively good result released on 29 April 2014.

4. Developmet Projects

According to FY2013 annual report, the 254 units double storey terrace houses known as Taman Ehsan Jaya in Pandamaran, Klang and the 40 units of 3 storey terrace houses named Laman Bayu @ Bukit Jalil were fully sold within a short period of time. 

The works for these housing schemes are targeted to be completed by Q4 2014.

(Taman Ehsan Jaya, Pandamaran)

(Laman Bayu, Bukit Jalil)

5. Concluding Remarks

(a) The group has strong balance sheets. Earnings starting to recover after being in the doldrum for many years. Existing PE mutiple at 8.7 times is reasonable.

(b) The group is sitting on huge undervalued landbank at Klang, which would contribute substantially to earnings if the group decide to ram up development.

(c) Overall, I would say that this company has huge potential. Unless there are factors that prohibit them from launching their development projects (which doesn't seem to be the case as they had been developing their Klang land recently), the group shoud be able to do well and reward shareholders accordingly in the future.

Have a nice evening.