Buying Into Melati Ehsan
Author: Icon8888 | Publish date: Tue, 10 Feb 2015, 03:57 PM
I first wrote about Melati Ehsan on 7 May 2014. Please refer to the link below.
http://klse.i3investor.com/blogs/icon8888/51630.jsp
However, I did noy buy any share at that time as the share price was about RM1.28. In my opinion, the stock was fairly valued and has limited upside.
Melati subsequently went up to RM1.50. But in the subsequent quarters, it announced results that were not so satisfactory and share price has since retraced to RM1.04.
Quarter Result:
| F.Y. | Quarter | Revenue ('000) | Profit before Tax ('000) | Profit Attb. to SH ('000) | EPS (Cent) | DPS (Cent) | NAPS |
|---|---|---|---|---|---|---|---|
| 2015-08-31 | 2014-11-30 | 54,894 | 4,480 | 3,262 | 2.73 | - | 1.5100 |
| 2014-08-31 | 2014-08-31 | 70,475 | 3,351 | 2,410 | 2.01 | 2.75 | 1.4800 |
| 2014-08-31 | 2014-05-31 | 108,158 | 8,951 | 6,640 | 5.55 | - | 1.4600 |
| 2014-08-31 | 2014-02-28 | 78,025 | 7,203 | 5,290 | 4.42 | - | 1.4300 |
| 2014-08-31 | 2013-11-30 | 66,485 | 6,846 | 4,984 | 4.16 | - | 1.3900 |
| 2013-08-31 | 2013-08-31 | 80,851 | 8,071 | 6,280 | 5.24 | 2.50 | - |
| 2013-08-31 | 2013-05-31 | 55,164 | 1,475 | 1,086 | 0.91 | - | 1.2900 |
| 2013-08-31 | 2013-02-28 | 50,009 | 5,024 | 3,293 | 2.75 | - | 1.3000 |
If you annualised Melati's latest quarter EPS, the stock is trading at about 10 times PER now. For a small cap construction company, it is not exactly undervalued.
However, with 120 mil shares, market cap now is only RM124 mil. With such a small market cap, as long as it can secure a contract of let's say, RM200 mil to RM300 mil this year, share price should be able to go up by 10% to 20% easily.
(I seldom buy into big cap construction stocks as they would require billions of Ringgit of construction contracts to trigger a re-rating)
Benalec and Kim Lun were re-rated recently after they announced contracts win.
(Benalec)
(Kim Lun)
But for me, it is not fun buying into a construction company AFTER it annouces contracts win. The bulk of the upside has been harvested by insiders.
It is better to buy earlier and wait for the contracts to be awarded.
But of course, the risk is that the company might not be able to secure any contract during a particular period. It is a risk that you need to bear in order to enjoy the benefit of potential contracts win.
Note : according to this article below by The Star dated 24 May 2014, Melati has order book of RM3.2 billion. However, I am not able to find any information in the annual reports or Bursa announcements. I have discounted this piece of information. Maybe it was a typo ? (please refer to yellow highlighted below)
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CRCP works at Central Spine Road, East Coast Economic Region.
SINCE being listed on Bursa Malaysia seven years ago, Melati Ehsan Holdings Bhd, a turnkey contractor cum property developer, has not created major waves in the market.
But’s that not to say it hasn’t been keeping busy.
Right now, the company which derives at least 70% of its earnings from construction activities, is looking forward to a “sizeable” Sabah job and keeping a keen eye on potential land buys for its property business, executive director Datuk Tan Hong Hing says.
“Collectively, we have submitted over RM1bil worth of tenders,” he tells StarBizWeek, adding that the company has a history of obtaining some 60% of jobs that it bids for.
Although Tan does not divulge more on the Sabah job, it is understood that it is a “build and lease” contract within the education sector.
Unlike some of its high-profile counterparts, Melati is not covered by any analyst, according to information on Bloomberg.
Tan calls the company “conservative and quiet” in this regard and says that it takes on jobs “within its means” to avoid over-gearing itself.
Based on its latest quarterly results, Melati has borrowings of some RM19mil while cash and cash equivalents equal RM35.8mil.
For the six months to Feb 28, its net profit stood at RM10.27mil, 108% higher than the net profit of RM4.94mil it registered for the same period, a year earlier.
Melati is 49% controlled by businessman Tan Sri Yap Suan Chee.
Its second largest shareholder is Lembaga Tabung Haji which has a 7.29 %stake.
All of the firm’s jobs are from the Government and there are no plans to go overseas nor venture into tendering for work from the private sector, Tan says.
“We prefer Government jobs, as there is no issue with the payments, we also have a good and long track record with them.”
Still, for those who bought Melati shares at an IPO price of RM1.28 way back in 2007 and kept the stock until now, the stock’s performance is bound to be a disappointment, to say the least.
It ended Friday at RM1.15, 10.2% lower than its IPO price but 109% higher than its all-time low of 55 sen.
At the current price, it’s also some 34% lower than RM1.75, the highest it’s ever reached in its listed life, thus far.
Melati has no dividend policy but has paid out 25% of its profits every year since its listing.
“We intend to carry on with this,” says Tan, “as we want to have adequate reserves for expansion”.
He doesn’t comment on the company’s lacklustre share price trend over all these years.
“We just focus on the business.”
Steady order book
Currently, Melati has a construction order book of RM3.2bil which is to last it for three to five years, Tan says.
It is working on more than RM500mil worth of contracts at the moment.
Net profit margins are roughly about 10%.
Among the current jobs that it is working on is the “Central Spine Road, Pakej 3: Gua Musang, Kelantan Ke Kg. Relong, Pahang” job located in the East Coast Economic Region (ECER).
Its job scope for this include earthworks, drainage, road pavement, geotechnical, slope protection and bridge construction.
Tan, an engineer by training, is particularly proud that the group is the first Malaysian company to invest “several” millions to import slip-form concrete pavement machinery from Germany to undertake continuously reinforce concrete pavement (CRCP) works for the project.
According to him, the higher initial cost required to construct CRCP roads is offset by its higher durability thus requiring minimal maintenance after completion.
“In other words, the life cycle cost for CRCP roads is much lower than the conventional flexible pavement (premix) roads commonly constructed in Malaysia.”
Also on Melati’s plate right now is the construction of residential projects in Taman Ehsan Jaya at Pandamaran, Klang which will comprise 254 units of double-storey terrace houses and its Laman Bayu project in Bukit Jalil, which will see the construction of 40 units of 3-storey terrace houses. Both are expected to be completed by the fourth quarter of this year.
Other jobs it is also carrying out include construction works for office facilities in Medini Iskandar in Johor Baru and the building of a secondary school at Precinct 17, Putrajaya for the Ministry of Education.
Apart from the Sabah job, Tan is mum about the other fresh jobs that it has submitted tenders for as the construction industry is “competitive”, he says.
“So it’s best not to say anything prematurely.”
Slowdown of mega contracts
He is aware of industry reports which say that a slow-down in the award of contracts for mega projects will happen this year as the Government addresses its fiscal position but does not appear too concerned.
“We are expecting most of the jobs that we have bid for to kick-in next year, besides we are also carrying out our own property development projects.”
He adds that most of Melati’s jobs are “niche” and those that it bids for normally fall under the “fast-track” segment of Government jobs as these jobs are often “urgent”,
“For example the Central Spine Road project, this is urgent as the stretch we are working on is known to be a dangerous stretch, resulting in many accidents.”
Under its property development segment, Melati currently has a joint venture with Selangor State Development Corp (PKNS) for a proposed mixed development with a projected gross development value of more than RM2bil.
It is waiting for land issues between PKNS and the city council to be ironed out before any planning for the development in Kelana Jaya can start, Tan says.
He offers general views on the outlook of the property scene in the country, saying that Malaysia’s favourable demographics with a relatively young population, rural-urban migration and high employment rate will continue to support growth in this sector.
“However, we don’t expect property prices to rise as fast as they did in the past few years but to increase moderately, moving forward.”
Still, recent government intervention in the property market through financing curbs and taxes will result in some correction of sorts in prices somewhere in between, he says without providing any estimates for this.
“However, the impact may be short-term.”
Property prices will not fall drastically due to the increase in cost of land, raw materials and wages, Tan adds.
Melati currently has about 125 acres in Klang, Shah Alam and Kuala Lumpur.
Like most that are involved in property development, the company is always on the lookout for ways to strengthen its footing in the property development sector by acquiring land at strategic and prime locations.
“In addition, this is to accumulate and enhance our asset base for medium and long-term development.”
Tan says its acquisitions are all through direct purchases or strategic joint ventures with land owners whereby the company provides a profit guarantee to the latter.
As under the radar of analysts and it appears, the investing community as Melati is, it seems to have its hands full for the moment.
“Our doors are always open for parties who are interested in the company,” Tan says.
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