By Stella Goh – As published in Inve$t Malaysia 12 June 2020 issue
Overview
EITA Resources Berhad (EITA) was founded in 1996 and is headquartered in Subang Jaya, Selangor. The comapnt has grown to be a leading supplier to electrical contractors, switchboard fabricators, original equipment manufacturers (OEM) and manufacturers of Elevator Systems and Busduct Systems in Malaysia. Today, the company has expanded its business operations to the other Asian countries.
EITA was listed in Main Market of Bursa Malaysia on 9 April 2012. The company’s suppliers and technology partners comprise some of the most respected names in the world such as Fuji Electric Asia Pacific, Leoni Studer AG (Switzerland), Panasonic Electric Works, Kyoritsu Keiki Co Ltd to name a few. EITA Research & Development Sdn Bhd provides in-house research and development (R&D) services for its own elevator and busduct products.
Business Model
EITA is involved in three core business segments namely E&E Components & Equipment, Elevators and Busduct Systems. Its business activities revolve around Design and Manufacturing, Marketing and Distribution, and Services for both passenger and commercial goods elevator systems.
The services provided by the company include designing, manufacture, installation, modernization, commissioning, maintenance and customization such as car size, interior design, hall door jamb, hall call button as well as indicators to suit its customer needs. As the company strives for modernization, passenger elevators can be equipped with LCD panels as well as audio systems to provide passengers with entertainment, news and advertisements.
To provide more rounded service to the clients, EITA also offers products and services such as power equipment system, cabling system, control equipment system and local area network (LAN), security systems, green technology, lighting and surge protection. To-date, EITA has installed over 3,400 units of elevators and escalator systems.
Financial Review
For FY2019, EITA has declared a first interim dividend of 3sen per ordinary share equivalent to RM3.899 million which was paid to its shareholders on 27 September 2019. EITA also has paid a final dividend of 3sen per ordinary share also amounting to RM3.899 million for the financial year end with a total final dividend of 6sen per ordinary share (4.36% dividend yield) in FY2019. Despite the total dividend paid in FY2019 being not the highest over the past 3 years, EITA has been able to pay out a favorable dividend consistently with a dividend payout ratio of 37.5%. The company has been consistently declaring a dividend payout of more than 30% of its net profit to its shareholders over the past 4 years. (refer to Prospects & Challenges and Insight at the end of this article)
EITA has achieved the lowest quality of earnings of 1.133 times in FY2019 over the past 3 years. Inspite of this EITA was still able to maintain its quality of earnings at more than 1 time over the past 3 years indicating that the company’s operating cash flow generated from the business is more than the net income suggesting that the business has strong cash flow and is financially sound.
Based on the computation of liquidity ratio, EITA has a current ratio of 2.232 times in FY2019 as compared to 3.100 times in FY2018. Even though the current ratio in FY2019 was the lowest over the past 3 years it still indicates that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM111.806 million) if any unforeseeable circumstances occur. EITA is able to do so by using its current assets such as inventories, contract assets, trade and other receivables, current tax assets, deposit, prepayments, cash and bank balances amounting to RM249.570 million.
EITA has a marginally lower gross profit margin of 28.17% in FY2019 as compared to 29.87% in FY2018 but was still higher than the 27.3% in FY2017. The decrease of Gross Profit Margin in FY2019 was mainly due to the increase of contract costs recognized as expenses and cost of goods sales as compared to FY2018. However, the company has achieved a total revenue of RM305.386 million in FY2019 compared to RM261.295 million in FY2018. The increase in revenue was mainly due from the Manufacturing (35.8%), Marketing & Distribution (25.9%), High Voltage segments (25.2%) and Services (13.1%).
EITA’s Return on Equity has tapered down to its lowest over the past 3 years at 12.01% in FY2019. However the company was still able to maintain its Return on Equity (ROE) of more than 10% indicating that it is being well managed and is making good profit in relative to its shareholders’ capital. It may also indicate that the sales generated by the company is more than its asset since the company has an asset turnover ratio of more than 1 times in FY2019. The management of the company is seen as effective and capable in effectively deploying the resources in the company as well.
EITA has achieved the highest Total Debt to Equity ratio of 0.175 times in FY2019 among the past three financial years. Even though the Total Debt to Equity ratio of EITA has increased in FY2019, the company is able to pay off its debt obligations as its total liabilities amounted to RM127.590 million as compared to RM176.215 million of total equity.
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM24.715 million in FY2019 as compared to RM26.794 million in FY2018. The decrease in net cash from operating activities was mainly due to the increase in working capital requirements for the company’s on-going operations. Even though the cash flow is lesser in FY2019, the company has enough cash to use for business expansion.
The net cash from investing activities in FY2019 (-RM17.177 million) was mainly due to the acquisition of property, plant and equipment (RM15.606 million), acquisition of investment property (RM1.805 million), acquisition of intangible asset (RM255,000) and tax paid on the gain of disposal of investment (RM15,000). The negative cash flow indicates that the firm is investing in its business for growth.
The net cash generated from financing activities in FY2019 (RM6.023 million) was mainly due to proceeds received from bills payable (RM6.551 million) and proceeds received from term loans (RM8.833 million).
Prospect and Challenges
The current geo-political and economic situation certainly poses some challenges ahead. In particular, the on-going trade tensions between China and the United States, Brexit, protectionist European Union sentiments, geopolitical tensions in the Middle East and volatility of commodity prices.
According to Managing Director Fu Wing Hoong, he remains confident that the current situation is only a slight hiccup to another potentially good year. He also expressed optimism that the company will produce similar, if not better results than FY2019, backed by the company’s existing order book. As at the end of FY2019, its order book stood at a total of RM512.52 million of which about 42% or RM215.33 million was from its manufacturing business. The company’s high-voltage system segment, which involves installation of power substations, has also been growing steadily and now comprises 54% or RM276.38 million for the company’s order book. The contract periods for the projects in both segments range from two to three years.
EITA’s current orderbook included government projects under the Light Rail Transit Line 3 (LRT3) and Mass Rapid Transit 2 (MRT2) to provide lifts and escalators installation and maintenance services. Both projects have been re-evaluated and renegotiated by the previous government which resulted in the LRT3 original contract sum of RM195 million being reduced to RM67.5 million but the MRT2 contracts value remains unchanged at RM70 million. The Managing Director stated that the MRT2 project’s contract value has been added to its FY2020 orderbook with the revenue progressively recognized from this year until FY2022.
Rating System
Return on Equity (ROE) = Average
Revenue [3 Years CAGR] = Poor
Net Earnings [3 Yeas CAGR] = Good
Dividend Yield = Average
Interest Coverage = Excellent
Quality of Earnings = Good
EITA Resources Berhad Share Price Over 3 Years
My Insight
Based on calculation on the Discounted Earnings Model, EITA has an intrinsic value of RM1.689. The current share price of EITA is RM1.25 which makes it an undervalued stock (as at 11 June 2020). EITA has a beta of 0.703 (500 days) indicating that the share price is less volatile than current market. Based on computation of Compound Annual Growth Rate (CAGR), EITA has an expected market return of 2.04%.
In conclusion, EITA may look attractive to investors due to its consistent dividend payout for the past 4 years which worked out to a dividend yield of 4.36%. EITA’s debt level will be comforting to those investors who find a company’s high debt reason for concern due to the global economic uncertainty ahead. The company has a net cash of RM68.727 million in FY2019 as well as more liquid assets (RM249.570 million) as compared to its current liabilities (RM111.806 million). According to the Deputy Transport Minister Kamaruddin Jaffar, the government has always given priority to improving the public transport system with several large scale public transport projects under construction in Klang Valley such as the Sungai Buloh-Serdang-Putrajaya MRT and LRT3 projects which would boost economic growth while increasing the use of public transport in Klang Valley. Meanwhile, the company’s prospects remain bright as the company’s long-term plans as a provider of lifts and escalators for Light Rail Transit Line 3 (LRT3) and Mass Rapid Transit 2 (MRT2). While investors will need to take into consideration all aspects that could positively affect growth prospects, they still will have to bear in mind the other events that could pose challenges to businesses in the near future.
Disclaimers
The research, information and financial opinions expressed in this article are purely for information and educational purpose only. We do not make any recommendation for the intention of trading purposes nor is it an advice to trade. Although best efforts are made to ensure that all information is accurate and up to date, occasionally errors and misprints may occur which are unintentional. It would help if you did not rely upon the material and information in this article. We will not be liable for any false, inaccurate, incomplete information and losses or damages suffered from your action. It would be best if you did your own research to make your personal investment decisions wisely or consult your investment advisor.